Explore the Advantages of Having a Good Credit Score
You probably don’t need a reminder that poor credit can put up roadblocks. But you might not realize all the benefits of good credit. Good credit can help you save money even when you’re not borrowing money. That’s why we’re trying to make it easier to understand and improve your credit. Something so important shouldn’t be a mystery.
Understanding the benefits of good credit
Let’s start with some of the basics: how your credit can affect your personal finances and the main factors that determine your credit scores. Some of these are well-known, but others might be surprising.
For instance, your credit history and scores can impact:
- Whether you get approved for a new credit card or loan
- The interest rate and loan amount or credit limit on a loan or credit card
- Security deposit requirements for utility, cable, and cell phone accounts
- Options and security deposit requirements for a rental home or apartment
In most states, your credit history and credit-based insurance scores can also affect your auto, life, and home insurance premiums. And your credit history, but not your credit scores, may affect your employment opportunities.
Refresher: What is a credit score and how is it calculated?
A credit score is an assessment of your credit risk based on an analysis of one of your credit reports. The credit scoring model—FICO and VantageScore create many types of credit scores—considers the information in one of your credit reports from either Equifax, Experian, or TransUnion to determine your score.
Credit scoring models consider many factors, but the main ones are often grouped into four categories:
- Your history of making or missing payments: This includes your history of making payments on time, missing payments, having accounts sent to collections, and filing bankruptcy. Making at least your minimum payments on time is best for your scores.
- How you’re using credit: How many accounts you have with balances, how much debt you have, and your current balances relative to the initial loan amounts or credit limits are all scoring factors. Your revolving credit utilization ratio can be an especially important part of this category.
- How long you’ve used credit for: The average age of the accounts in your credit report, the age of the newest, and the age of the oldest accounts can also impact your scores. Having more experience with credit can help you get a higher score.
- The types of credit you have: Having a mix of installment accounts (loans) and revolving accounts (lines of credit and credit cards) can help your credit scores.
Most credit scores range from 300 to 850, with a higher score indicating a person is less likely to miss a bill payment by 90 or more days. In other words, a high credit score is better.
How good credit can save you money
Your credit scores can affect many aspects of your life, including your access to different types of accounts and the rates and terms you receive. Good credit can make taking out a loan, opening a credit card, and renting an apartment easier and cheaper.
Many organizations use your credit score when setting the rates and terms for various types of agreements.
1. Save on interest
A good credit score can help you qualify for lower interest rates on loans and credit cards, which can lead to paying less interest overall and lower monthly payments.
Loans often have fixed interest rates, which means the rate you receive won't change as you repay the debt. However, if your credit score improves, you can look into refinancing the balance with a lower-rate loan.
Many credit cards have variable rates that are made up of a baseline rate based on your credit score plus a margin rate. Good credit can lead to a lower baseline rate, but your credit card’s interest rate can still change when the margin rate goes up or down.
2. Avoid upfront loan fees
Some lenders charge an origination or administrative fee that’s taken out of your loan’s proceeds or added to the loan's balance. A good credit score could help you qualify for a loan with a lower—or no—origination fee.
3. Lower your security deposits
Good credit also might help you qualify for a lower (or no) security deposit when you:
- Rent an apartment or home
- Open a utility account
- Start a postpaid phone plan
Even if you might get the deposits back when you move or close your account, the upfront costs can be prohibitive.
4. Get better insurance rates
Your credit reports can affect your credit-based insurance scores, which are different from standard credit scores.
Some states outlaw the use of credit-based insurance scores. But in most places, your insurance scores can affect your home, life, and auto insurance premiums.
Even where they’re allowed, insurance companies generally can’t deny your application or renewal, or charge you more based solely on your score. Still, a better credit-based insurance score might save you money.
5. Access more financial products
Although creditors consider many factors when you apply for a new account, good credit can help you qualify for:
- Unsecured credit cards and personal loans
- The best credit cards, which offer lots of benefits and perks
- Higher credit limits on credit cards and loan amounts on loans
You also might be able to qualify for more and better car loans or leases, types of mortgages, and student loans. (However, federal student loans are often the best place to start, and most don’t require a credit check.)
Improving and maintaining a good credit score
Many factors can affect your credit scores, but the basics of building and maintaining good credit scores are fairly straightforward:
- Pay bills on time: On-time payments that get reported to the credit bureaus can help you build a good credit history. Late payments can hurt your scores and lead to having accounts sent to collections. A collection account can hurt your credit scores even if the original account wasn’t reported to the credit bureaus.
- Keep credit utilization low: The balance on your revolving credit accounts relative to their credit limits is an important scoring factor. A low revolving utilization rate is best for your credit scores, which is one reason why paying down credit card balances is important. Ideally, you can also pay your credit card bill in full each month to avoid interest charges.
- Avoiding unnecessary credit inquiries: Applying for new accounts may lead to a hard inquiry—a record of when someone checks your credit report before making a lending decision. Hard inquiries can hurt your credit scores a little, so try to avoid applying for accounts unless you're likely to get approved.
Of course, knowing the basics and being able to implement them aren’t the same. Especially when the accounts that you can use to build a good score aren’t available or are more expensive for people with low credit scores.
But whether you have bad credit or no credit, you can get started with Ava and qualify for an Ava Card and Ava Savings Builder Account without a hard inquiry.
The high-limit card helps lower your utilization rate, the combination can help your credit mix, and your on-time payments for both accounts get reported to all three credit bureaus to build your positive payment history.