6 Huge Benefits of a High Credit Score
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Having a low credit score is like running the Boston Marathon with a broken foot: It's possible to make it to the finish line, but it's much harder. Meanwhile, having a high credit score is like running the race in peak condition. Here are six of the benefits of a high credit score.
1. More easily secure a loan
When you apply for a mortgage, credit card, auto financing, or any other consumer loan, lenders want to know you will repay the debt as promised. Their only indication of your credit-worthiness is your credit score -- the three-digit number between 300 and 850 that "grades" everything in your credit report, from how much debt you have to how often you've paid bills late. The higher your credit score, the more confident lenders are that you will repay the money they lend.
You never know when you are going to need a loan. If your basement floods, your child needs emergency dental work, or your pet breaks its leg, you may need a loan to cover the expense. Having a high credit score means quickly gaining access to money when you need it.
2. Pay less interest
A huge benefit of a high credit score is the savings you will enjoy due to lower interest rates. Let's say you walk into your local bank or credit union at the same time as a customer with a low credit score. You each request an auto loan for $35,000. Due to your high credit score, you are offered an interest rate of 3.25%. The other borrower is hit with an interest rate of 12% due to their low credit score.
If you each borrow the money for 60 months, your monthly payment will be $633. The borrower with a lower score? $779. By the time the loans are paid in full, the other borrower will have paid $8,760 more than you did.
3. Rent a great home
Tenants who do not pay their rent in full or on time are a landlord's nightmare. Often, landlords are still paying mortgages on the places they rent out, so they must come up with the monthly mortgage payments whether their tenants pay rent on time or not. If a tenant stops making payments, a landlord becomes mired in the legal hassle of having them evicted. All that is why landlords stay on the lookout for tenants with high credit scores.
Renting is serious business, and in most markets, there is competition for the best homes in the nicest neighborhoods. An advantage of a high credit score is that you often move to the front of the line, leaping over applicants with less-than-stellar scores.
4. Land a job
Having a high credit score means never having to worry about whether your score will prevent you from landing the job of your dreams. Like creditors, employers want to know you can be trusted to manage finances. Roughly three in 10 employers check a person's credit score before hiring them. If you're in a field like finance or will otherwise be working with money, you can be sure your score will be checked.
5. Gain the upper hand in negotiations
It may be unfair, but creditors know they have the upper hand when working with people with low credit scores. Those borrowers do not have the same options as a borrower with a high score.
Let's say you're taking out a personal loan to finance a kitchen remodel. Your high score tells the lender two things: You know how to manage money, and are not desperate for their loan. If the lender does not offer you their best interest rate and terms, another lender will.
6. Pay less for insurance
Studies indicate that credit scores help predict insurance losses. That's why a high credit score can help keep your premium rates low for both auto and home insurance. According to Nationwide Insurance, 92% of all insurers now factor in credit score when determining auto premiums, and Insurance.com reports that homeowners with poor credit pay 122% more on average -- which is more than double -- than those with good credit.
How to achieve a high credit score
If your credit score is not as high as you would like (or high enough to earn you valuable benefits), these steps will help raise your score:
Check your credit report: Order your credit report once a year for free through the AnnualCreditReport.com website. And note that during the COVID-19 pandemic, the big three credit reporting companies -- Experian, TransUnion, and Equifax -- are offering weekly credit reports for free. Go over your reports with a fine-tooth comb, looking for any errors. If something is wrong, dispute it with the reporting company in question. Little mistakes (like claiming you owe a balance you have already paid in full) can drag your score down.
Pay all bills in full and on time each month: Putting your accounts on autopay is one of the best ways to make sure everything gets paid.
Reduce debt: Credit utilization (also called debt-to-income ratio) refers to how much debt you use relative to how much you have available, and accounts for 30% of your credit score. Aim to keep your debt as low as possible.
Consider a secured credit card: A secured card works like this: You make an upfront deposit equal to your "credit limit." Say you deposit $500. That means you can charge up to $500. Like a standard credit card, you pay the amount in full by the end of the first billing cycle or make monthly payments. Either way, the best secured credit card companies report your payments to the credit bureaus (make sure yours does), helping to raise your score. The interest rates and fees are higher than those of a typical credit card, so only use a secured card until your credit score is high enough to qualify for a standard card.
Maintain a mix of credit: 10% of your credit score depends on keeping a good mix of credit. Creditors want to know that you can handle more than one type. For example, an auto loan, credit card, student loan, and rent payment provides a better credit mix than five credit cards and a student loan.
It will take time, but with a plan and dedication, you can one day enjoy a high credit score and all the perks that entails.
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