A credit score is a number lenders use to help them determine how likely it is that a potential borrower will repay their debts on time if given a person a loan or a credit card. This score is vital to a person’s financial health and is an essential contributor to wealth building.
Responsible credit card use can allow an individual to make large purchases they may not normally be able to afford. Credit scores can range from 300 to 850, with any score over 720 generally seen as good.
“Having a strong credit history and good credit scores can help you achieve many of the things we want in life and it’s a key component of financial health,” said Rod Griffin, senior director of consumer education and advocacy at Experian. Here’s a closer look at why those three numbers really matter.
Why Is Good Credit Important?
Good credit, earned by paying off credit card debt each month, staying on track with payments and growing your credit limit, is an important factor that can determine what types of credit you qualify for and what interest rates you may have to pay.
“With a prime credit score, you may be able to access better offers, including low interest rates and no fees on credit cards,” Griffin said, “Consumers with subprime credit scores are usually required to pay larger deposits and may be faced with higher interest rates.”
In addition to granting you lower interest rates, you’ll also have access to better credit cards that offer exclusive perks, like free flights or access to private airport lounges. Check with your credit lenders to see what benefits are offered for higher-tier credit cards. Generally, the more exclusive the credit card — as in, the better the credit you need to qualify for the card — the better the perks will be.
What Bad Credit Can Do
Having a bad credit score can impact many aspects of your financial life.
“All credit scores have the same basic goal: helping lenders and other potential creditors, such as landlords and utility companies, understand how risky it may be to do business with you,” Griffin said. “However, credit scores are not only used to make lending decisions. An extremely low credit score, which suggests a history of poor debt management, may cause creditors to decide against lending you money, leasing you an apartment, or issuing you phone or cable equipment.”
Bad credit can prevent you from access to many basic things. It is important to be diligent when paying off your credit card — and ensuring, above all, to not spend beyond your means. Credit cards are not free money. Debt must always be repaid, and it is difficult to build your credit score back up once it is low.
While it’s important to maintain good credit scores, it’s also important to understand the information in your credit report.
“Your credit history can impact more than your ability to secure a loan, credit card or mortgage,” Griffin said. “When you’re applying for a rental property or a lease, your credit report may be used as part of the decision process. It can also be used to determine the deposits that may be required from utility companies. Similarly, your credit report may be pulled by a prospective employer when you’re applying for a job, although it’s important to stress employers never receive credit scores.”
It is important to do all that you can to maintain good credit. While it’s ideal to pay your balances in full every month, make sure you at least pay your monthly minimum — that way, you will not be dinged for late payments. Good credit can open new doors for you.
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