Are you a low or high credit risk? How do you know? When you’re looking to open a line of credit by taking out a loan, applying for a credit card, or financing a car, you have to know your credit standing. Your credit score changes based on various financial activities, so be sure to keep close tabs on your budget.
A strong credit score and accessible credit are powerful assets. With good credit at your disposal, you can access better financing terms and other money-saving resources due to your status as a trustworthy borrower. When you manage your credit wisely, you can earn rewards and save on interest—all while continuing to bump up your credit score even more.
Your Credit Questions, Answered
If you’re just beginning to build credit or don’t yet have a credit score, that’s OK. For a better idea of how to start building your credit, check out our short video about establishing a credit history.
Having good credit starts with having the right financial knowledge. Below, we answer some pressing credit questions:
What does it mean to have good credit?
Essentially, your credit score helps lenders determine whether or not you’re a safe credit risk and the specific conditions and requirements of whatever loan you’re applying for. Paying back loans and other debts—including credit cards—on time and within the agreed-upon parameters contributes to good credit. This numeric classification of your credit history is what makes up your credit report. When you first apply for a credit card, make sure you understand the implications that opening a line of credit can have on your credit report.
Generally speaking, the best way to raise your score is by paying outstanding debts. Some other factors that influence your credit score are:
- Length of credit history
- Types of credit used
- New credit lines issued
- Recent credit inquiries
Why is it important to establish good credit?
It’s certainly possible to get by with bad credit, but it’s more difficult and often more expensive overall. Ideally, by establishing a good credit score (greater than 670), you set yourself up for a smoother financial future. For example, your likelihood of getting approved for a loan is higher while your interest rate is lower.
Benefits of Having Good Credit
What is the benefit of having a good credit score exactly? Here are three key reasons you should prioritize your credit and a few advantages of maintaining a good credit score:
1. It’s better for your wallet.
One of the biggest advantages of good credit is that it enables you to qualify for better credit cards, including ones that offer rewards as an incentive for spending with your card. In fact, being in good standing credit-wise can lower your interest rates on credit cards and even loans.
Credit card rewards are typically paid out as a percentage of your credit card spending and can include anything from frequent flyer miles to travel vouchers to cash back applied to your balance. Over time, these rewards can help offset the cost of future purchases and put a little extra money in your pocket.
2. It’s better for your budget.
A healthy credit score can also give you additional savings opportunities to pad your budget. Depending on how high your score is, you can also reap the following benefits in other areas:
- Receive better insurance rates, including for car insurance.
- Sign up for cell phone contracts without a deposit.
- Hook up utilities without a security deposit.
As we mentioned, it’s also cheaper to borrow money when you have good credit because you qualify for lower interest on virtually any personal loan. With more room in your budget, you can allocate more money toward additional investments to build wealth faster. Thus, improving your credit standing increases these payouts.
3. It leads to better financial opportunities.
Believe it or not, some credit card companies will offer a lower annual percentage rate to account holders who have a strong track record with the company. Furthermore, good credit can beget more good credit, especially when you’re asking for a limit increase. If you’ve been paying your credit card bill on time and have a low credit utilization ratio, you might be eligible for a credit limit increase.
Moreover, a high credit score gives you more negotiating power when you’re ready to buy a home. It helps to back up the claim that you will pay your mortgage off on time, allowing you to negotiate a better price. And if you’re looking to rent, a good credit score can prove to your potential landlord that you’re capable of making the payments, widening your pool of rental options.
One of the best ways to protect your good credit is by paying off your credit card balance in full every month. You’ll continue to build a strong track record on your credit report, and these consistent payments can earn you access to special promotions from your credit card company, including balance transfers, exclusive loan products, and even better rewards. Plus, full payments allow you to avoid paying unnecessary interest and keep your credit in top shape for the future.
A good credit score is something any consumer can be proud of. Use your credit score to save on interest, improve your spending habits, earn rewards, and build an even stronger credit score over time. Start budgeting today to be on your way to enjoying the benefits of having good credit.