Have you heard from some financial gurus that you don’t need to maintain a good credit score or even have one at all? Well, you don’t. But it will cost you.
Even if you want to never have another credit card and won’t need to take out a loan anytime soon, the benefits of having a good credit score touch your life in ways you may not have imagined.
As a point of clarification, when we talk about a good or bad credit score, what does that mean? There are different versions of credit scores, but the most popular are FICO and VantageScore. They both have scores ranging from 300-850.
In general, a good credit score is 690+ and an excellent score is 750 and above.
Here are some of the advantages of a good credit score:
1. Better cell phone plans
Planning to sign a new mobile phone contract? To be a “qualified customer” that gets the best deals with no cash down, you may need good credit. Some cell phone companies will run a credit check to ensure you are able to fulfill the obligations in your contract.
Those with lower credit scores may be required to provide a deposit or only qualify for lower-tiered plans.
On the other hand, you can avoid the credit check and contracts altogether by using a prepaid plan.
2. Qualify for more jobs
Looking for a new job? It’s not surprising that most employers conduct background checks.
There are some employers that will also check credit reports (but not your credit score) as part of the hiring process as well. However, you will know when it happens because the employer does need your permission to do the credit check.
You are more likely to run into this if you are looking for a job in the financial or government sectors or one that handles significant sums of money. The employers will be checking the report for signs of trouble managing payments and financial difficulties.
While your credit score isn’t being reported here, the overall health of your credit report does primarily make up your credit score. So if you have a good or excellent credit score, it’s likely your credit report is in good standing as well.
3. Earn better credit card rewards
Now, why would a better credit score qualify you for better credit card rewards?
Well, think about it. There are credit cards available that have some pretty sweet rewards, whether it’s cash back or rewards points. But to get those rewards, you need to spend money using those cards.
Of course, the credit card companies want their money back, so if they are going to be generous with nice rewards, they want customers that are likely to make payments on time. How can they know this? That is something reflected in your credit score.
So, if you want to qualify for the best rewards cards, your credit needs to be good or excellent.
4. Better mortgage rate means more savings
If you buy a home, chances are pretty good you’ll take out a mortgage to finance your purchase. And guess what? A mortgage is a huge amount of debt to pay.
When rates are low as they are now, the rate doesn’t seem to matter. But it does. Even more so when rates increase. Did you know our first mortgage was at almost 8% and at the time, that was considered good? Ok, so not even considering the 8% rate, let’s look at recent mortgage rates.
The last reported median sales price of a home in the US is $317,400 so we’ll use that as our house price. As a conscientious buyer trying to avoid paying PMI, you put down 20%. That leaves you with a mortgage of $253,920.
But as we all know, that is just the principal amount. How much interest will you pay over a conventional 30-year mortgage? It depends on your credit score. MyFICO has a very cool loan savings calculator where you can punch in your own numbers. Here is what our scenario above yields:
So the difference between a fair credit score of 620 with a 5.686% mortgage and that of an excellent score with a 4.097% mortgage is $88,202 over the life of the loan.
Oh, and remember that 8%-ish rate we first had? As rates kept dropping, our good credit made it possible to easily refinance the mortgage at a better rate. Twice.
Renting forever? Even landlords may run a credit check to determine how likely you are to pay rent on time. A poor score could keep you from renting some apartments or you may need to put down a larger security deposit or need a co-signer.
5. Better terms when refinancing student loans
If you’ve been thinking about refinancing your student loans, it may not surprise you to learn that a good credit score helps. Why?
Before a lender takes on a new borrower, they want to ensure that the borrower is responsible and likely to pay back the loan. A good credit score indicates that you have a good history of making on-time payments.
Of course, your credit score isn’t the only factor lenders consider, but it’s an important one. The better the credit score, the better the interest rate and other terms will be if you qualify.
6. Homeowner’s insurance
As crazy as it may sound, if you have a low credit score, you could be paying almost double the amount for homeowner’s insurance as your neighbor with an excellent credit score.
Now, not all states allow credit-based insurance scores for determining rates (Maryland and Hawaii ban this practice). But for those states that do, it definitely pays to maintain good credit.
How many insurers use credit-based insurance scores? Reports show it is almost 85% of all insurers.
7. Get cheaper auto insurance
Most car insurers use credit-based insurance scores, along with other factors, to help determine rates. That is unless you live in California, Hawaii, or Massachusetts where that practice has been banned.
How much can your credit score influence your auto insurance rate? WalletHub found that the difference between no credit and excellent credit can easily mean those with no credit pay nearly twice as much for insurance in some states.
So, while a good credit score won’t guarantee a great rate on your car insurance (especially if you tend to get speeding tickets or get into accidents), it can certainly help.
8. Get better car loan rates
If you are like most Americans and are buying a car with a loan, then, of course, your credit score comes into play.
Just as with buying a home or getting a personal loan, you will qualify for lower interest rates and better terms if you have a good credit score.
Have a low score? You may still qualify for a loan, but the interest rate will likely be higher, which just means you are paying even more for that new car.
Get and maintain an excellent credit score
As you can see, your credit score can impact many aspects of your life. Money saved by taking advantage of the benefits a good score provides can help you get ahead saving for retirement, a downpayment, a fun vacation, or paying off debts faster.
Don’t have great credit? It’s possible to improve a poor credit score, though it does take time. The main rules for improving a credit score also apply to maintaining a good score.
Not sure what is on your credit report? You can check your report for free at AnnualCreditReport.com.