Why Your Credit Score Is Important

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If there was ever a time to pay attention to your credit score, this is it. 

The financial crisis brought on by COVID-19 has had ripple effects on the finances of nearly everyone in the U.S., regardless of whether or not your employment has been jeopardized. By keeping track of your credit score, you can ensure you aren’t unnecessarily penalized in areas where you are entitled to protection under federal stimulus legislation. 

Your credit score might be just a number, but those three digits influence countless areas of your everyday life. Whether you want to buy a car, get a job, or even rent an apartment, your credit score will follow you everywhere. Having good credit is advantageous in many ways, while having bad credit may cost you money in ways you may not expect.

Why Your Credit Score Matters

Lenders use your credit score to determine your creditworthiness. Your credit score affects whether you get approved for credit cards, loans, mortgages, and auto loans, and influences the interest rate and terms lenders may assign you upon approval. 

Insurance providers, landlords, and employers may also review your credit score when you apply for an apartment or new policy. In these cases, a good credit score helps indicate your overall trustworthiness and responsibility.

How Credit Scores Work

FICO and VantageScore are the two main credit scoring systems. These companies calculate your credit score using information from your credit report, which is provided by the three credit bureaus — Equifax, Experian, and TransUnion. Because of this, your credit score will vary across different scoring models and versions. Lenders choose which credit scores to use when determining your creditworthiness, and some scores can even be specific to an industry or loan type.

In general, five main factors determine your credit score: payment history, balances owed, age of credit history, credit mix, and recent activity. Of those, your payment history and balances owed have the biggest impact on your FICO credit score.

How to Build Credit Without Debt

Borrowing money through an installment loan, like a student loan or mortgage, and paying it back over time does help build your credit, but it’s not your only option. And taking on high-interest credit card debt balances is definitely not the most effective method.

Instead, one of the best ways to build credit is to pay off your credit cards on time and in full each month, and keep a low credit utilization ratio. Not only will this help you build credit, you’ll also avoid paying hefty interest rates.

You can also use a service like Experian Boost to report nontraditional recurring payments to the credit bureaus, such as utilities, rent, and even your Netflix payment.

Growing Your Credit Through Good Habits

Whether you have no credit history, poor credit, or good credit, it’s important to keep good credit habits to maintain or even increase your credit score over time.

For the best results, always pay off your balances in full and make your monthly payments on time. Try to keep a low credit utilization ratio, ideally under 30%. Avoid closing old credit cards or applying for too many new credit accounts or loans in a short period of time. Regularly check your credit score and credit report to catch any issues or inconsistencies before they become a problem. 

Maintaining and Defending Your Credit Score

Maintain and defend your credit score by regularly monitoring your credit report for mistakes or potential fraud. 

Under the Fair Credit Reporting Act, you’re entitled to a copy of your credit report from each of the three credit bureaus annually, which you can access at AnnualCreditReport.com. From now until April 2021, you can get free weekly online credit reports from all three credit bureaus through the site. 

You can also use a credit monitoring service to automatically monitor your credit (usually for a fee).

In addition to catching errors, checking your credit report regularly helps prevent identity theft. Unrecognized accounts, unauthorized charges, or suspicious inquiries are all potential signs of identity theft that are best caught — and fixed — early. 

Pro Tip

You cannot hide from your credit score; it follows you your entire life. That’s why it’s important to understand the consequences of good or bad credit so you can take action.

Benefits to Having Good Credit

Auto loans

The best way to get a low-interest rate on a car loan? You guessed it: having good credit. The average monthly auto loan payment for a person with a high credit score (720–850) is $360 per month at 3.88% interest, according to data from myFICO. For someone with poorer credit (590–619), they will pay $444 per month for the same car — at an interest rate of 14.68%. The high-credit customer will end up paying $1,300 in overall interest, versus $5,320 for the low-credit customer. 

Mortgage approval and lower interest

Mortgage lenders not only set interest rates based on your credit, they’ll also use this information to determine how much of a loan they’ll give you in the first place. With good credit, you can better afford a home. 

Rental applications

Landlords use several factors to assess whether you’d make a good tenant, including proof of adequate income and references from past landlords. But some may decide to take your credit into consideration as well. Credit is a good indicator of your overall financial responsibility and the likelihood you’ll pay rent on time.

Credit card approval and lower interest

With good credit, lenders are more likely to approve higher credit card limits at lower interest rates. Not only will you have to pay less in interest on any balances you carry, but your credit score won’t be as impacted due to a lower overall credit utilization ratio.

Business loan approval and lower interest

You might think your personal credit and business credit are separate, but that isn’t always the case. Small business owners and sole proprietors often need to use their personal credit history to take out business loans.

Car insurance

Auto insurers use your credit score as one of many factors in determining your risk as an insured driver. Good credit is seen as a sign of overall responsibility and can land you lower premiums.


Depending on the type of position you are applying for, some employers will pull your credit report and use it to help determine if they will hire you. They will need your consent to do so. 

Negotiating power

Even those with good credit can fall on financial hardship due to circumstances out of their control. If you suddenly lose your income but have a solid credit repayment history, your lenders may be more willing to renegotiate the terms of your loans, including lowering interest rates to reduce payments.

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