Why is good credit so important?
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Today’s economy runs on credit. If you want to get a mortgage for a house or a student loan to pay for college—or if you just want to charge your lunch on a credit card—you’re going to need a lender to extend you a line of credit.
You’ll also need to be worthy of that line of credit. Your creditworthiness is defined by your three-digit credit score and is the key to your financial life. Good credit can be the make-or-break detail that determines whether you get a mortgage, car loan or student loan. Bad credit, on the other hand, will make it difficult to get a credit card with a low interest rate and more expensive to borrow money for any purpose.
Even if you’re not in the market for a loan, good credit can have a major impact. Landlords, insurers and employers frequently use credit information as a litmus test to see if the people they’re dealing with are reliable and responsible. Bad credit can suggest you’re a risky bet.
While your credit technically only shows the details of how you deal with debt, some will extrapolate the characteristics from your financial life to other situations. Good credit can signify that your financial situation—and the rest of your life—is on the right track. This means your credit score can affect your insurance rates, what apartment you’ll be approved for, and perhaps even whether you get that new job.
But what is a good credit score? Understanding why good credit is important and how to build a good credit score will help you take advantage of the benefits of good credit, so let’s take a close look at what you need to do to get your score within the “good credit” range.
What is a good credit score?
What is considered a good credit score? According to the FICO credit scoring model, credit scores fall into five distinct categories:
- Poor credit: 300-579
- Fair credit: 580-669
- Good credit: 670-739
- Very good credit: 740-799
- Excellent credit: 800-850
The good credit score range includes all FICO credit scores between 670 and 739. However, many people consider “good credit” to include any FICO score higher than 670. This means if you have excellent credit or perfect credit, you also have good credit by default.
If your FICO credit score is higher than 670, you not only have good credit but have also moved your credit from the “subprime” category to the “prime” category. People with good credit are more likely to benefit from the prime interest rate—which means that you might pay less interest on your credit cards, mortgages and loans.
Benefits of good credit
There are many benefits to having good credit. Landlords are more likely to rent you an apartment, for example. If you’re job-hunting, your employer may review your credit as part of the hiring process. But the biggest benefits of good credit are financial. Here are three ways in which good credit can make your life easier and more affordable.
Easier credit approval
If you have good credit, banks and lenders are more likely to approve your credit applications. This means when you apply for credit cards, loans or mortgages, you’ll be more likely to be accepted and may spend less time waiting to hear the results of your application.
Lower interest rates
In addition to having higher credit approval rates, people with good credit are often offered lower interest rates. Paying less interest on your debt can save you a lot of money over time, which is why building your credit score is one of the smartest financial moves you can make.
Better loan terms
People with good credit are often given better loan terms than people with poor credit. You might receive a higher credit limit on a credit card, for example, or you might be able to take advantage of a low fixed-rate mortgage.
How to get good credit
If you want a good credit score, you need to understand how credit scores are calculated and how to build credit.
Your FICO credit score is made up of the following five factors:
- Payment history: 35 percent
- Credit utilization: 30 percent
- Length of credit history: 15 percent
- Credit mix: 10 percent
- Recent credit inquiries: 10 percent
If you want to get your credit score into the good credit score range, you need to improve your credit habits as they relate to those five factors.
Since payment history makes up 35 percent of your credit score, try to make all of your credit card payments on time, every time. Missing a credit card payment can have serious negative effects on your credit score, especially if you don’t make up the missed payment as quickly as possible.
Your credit utilization ratio reflects how much of your available credit you’re currently using. If you want good credit, try to keep your credit utilization below 30 percent of your available credit. If you have $10,000 in available credit, for example, try not to let your total credit card balances exceed $3,000. If your credit card balances go past that 30 percent mark, pay them off as quickly as possible. That way, those high balances will have less of an opportunity to lower your credit score.
Length of credit history
Lenders like to see that you can manage credit accounts responsibly over a long period of time. This is why it’s a bad idea to close old credit cards, even if you’re no longer using them. Your credit report only tracks active credit accounts, and when you shut down your oldest credit accounts, you shorten your credit history. If you want to build good credit, keep your credit cards open.
The different types of credit accounts under your name account for 10 percent of your credit score. If you have both revolving credit (like credit cards) and installment credit (like a mortgage or a car loan), your credit score might increase by a few points. However, you can still build and maintain a good credit score even if you only have credit cards, so don’t worry if you don’t have much of a credit mix yet.
Recent credit inquiries
Every time you apply for a new line of credit, the bank or lender conducts an inquiry into your credit history. Having too many recent credit inquiries on your account can negatively affect your credit score because applying for a lot of new credit at once is a risky financial behavior. If you’re trying to build good credit, try to wait three to six months between credit card applications.
It’s also a good idea to check your credit score regularly and keep tabs on your credit report. Millions of Americans have errors on their credit reports, and those errors could be inadvertently hurting your credit score. So take a close look at your Equifax, Experian and TransUnion credit reports and dispute any mistakes you find.
How to maintain a good credit score
Building a good credit score is a start, but maintaining it will help you continue to take advantage of the benefits of good credit. How do you maintain good credit?
Essentially, you keep practicing the responsible credit habits that helped you earn your good credit score in the first place. Pay every bill on time, all the time. Keep your credit utilization ratio low, and avoid using more than 30 percent of your available credit. Don’t close old credit accounts. Instead, use your old credit cards as proof of a long and responsible credit history.
Keeping your credit score high is often easier than building credit, but don’t let your guard down. If you fail to pay your bills on time or charge balances you can’t pay off, you could see your score start to slip.
The bottom line
What is a good credit score? If your FICO score is over 670, you have good credit. There are many benefits of good credit, including access to better credit cards and lower interest rates, so it’s important to understand how your credit habits might be helping or hurting your credit score.
Once you know how to get a good credit score, you’ll be able to take advantage of all of the positive financial opportunities associated with good credit. These include access to today’s best credit cards, which offer everything from cash back rewards to luxury travel perks.