The Benefits of a Good Credit Score

Talk to anyone and they’ll tell you a high score is a good credit score.  Press them any further, and they may not have much insight into how else a good credit score benefits you.  Essentially, a credit score is an investment grade for people.  Just as we rate government and junk bonds, and restrict IRA’s to “investment grade” options, banks and other lenders need a way to tell if lending credit to a person will be a good or bad decision.  This decision isn’t a function of how much they’ll make, but rather if they’ll get their money back – a good credit score is a quick signal to them that, you’re worth it to them.

In my last post, I talked about how I got my credit score from 500 to 720.  Because I wanted to be extra helpful I even broke down the composition of a good credit score, so I highly encourage any readers to check that out as well.  In this post, I wanted to let you all know the great benefits of keeping your credit score up.  There are many different advantages and many are not that obvious.

Good Credit Score is Part of Life

Improving Your Credit is Part of Life

What is a Good Credit Score?

A credit score, most of the time, is the Fair Issac Corporation (FICO) score.  Now, the three credit bureaus are coming up with their own scores and there isn’t any ‘one’ score.  There are a ton.  The bright side is you can be pretty safe in the knowledge that while there are multiple scores from multiple agencies, they all follow roughly the same algorithms and assumptions.  Pay your bills on time and be financially savvy, and your scores will go up.

The FICO score, as the most commonly used, is the one I’ll be specifically looking at here, but they’re all similar. The VantageScore decided it had to be the unique snowflake and goes all the way up to 990.  So let’s see the ranges!

  • 300-629 is considered bad credit
  • 630-689 is considered fair credit
  • 690-719 is considered good credit
  • 720+ is considered excellent credit

Now you can see why I was happy to get my score above 720.  I’m channeling my inner Bill and Ted, ‘cause my score is excelleeeeent!  Party on dudes, party on.

Advantages to a Good Credit Score

So, we know what a good credit score is, but now for the real fun stuff.  The perks!  It’s no fun to work hard for something and it not have a payoff.

The first, and most obvious perk, is a lower interest rate on any financing.  From home, auto, and even credit a higher score means a lower rate.  That means by just being financially smart (and conquering your financial empire) you save thousands of dollars in the long run.  On a $100,000 home and 30 year mortage, a 4% interest rate compared to a 5% saves you $21,000.  That’s about $700 a year back in your pocket, rather than the bank’s bottom line.

Tying in with a lower interest rate is the ability to actually get financing.  Many lenders won’t even look at sub 650 borrowers due to their unstable financial habits.  When I was looking at buying a car, many lenders rejected my 640 credit score, and only my local credit union, whom I had a relationship with, was willing to front me money for the purchase.  However, they also hit me with a risk premium – a cool 5.85% interest rate.  That’s a 3% risk premium.  The real draw to getting financing is if you want to start a business.  The start-up capital can many times be enormous, and a bank will want assurances from the owners.  So not only are they going tear into your business plan, but they will also assess if you, as a consumer, have good spending habits.

If you need a place to rent, many apartments and landlords are now running credit scores.  The rationale is history of payments is one of the largest factors in a credit score, so a bad score can likely mean you have a history of not making payments on time.  If you can’t pay bills previously why should they believe you will pay your rent on time?  To help compensate for the risk of you not paying, a landlord may charge higher rent.

Like landlords, Human Resource employees for companies are increasingly looking at credit scores to find out if the employee is reputable and consistent in their personal life.  Companies rely on dependable employees. A bad credit score could be indicative of something going on their personal life that could affect their work.  Also, if you want to work in the public sector, many government agencies have credit minimums to work for them.  Police officers and finance employees are being heavily scrutinized when it comes to their credit score.  Not having their finances intact could leave them open for a bribe or other such nefarious action that would leave the agency on the hook for some bad publicity and potential lawsuit!

Those are the four main reasons to have a good credit score.  There are some other minor ones – like having bragging rights or being eligible for better reward credit cards that help your overall bottom line.  As you can see though, being financially smart and increasing your score is a worthy goal.

The Takeaway

It’s good to know that per FICO’s own records, more than half of all borrowers are above a 700 credit score.  Strive to get it as high as possible though.  If you’re in a position where you’re having a hard time deciding if you should pay down debt or start investing, read this article.  Don’t forget to like Cash Flow Celt on Facebook and share the article if you enjoyed it!  Time to show your friends that you’re out there conquering a financial empire.

Readers, have you experienced life with good and bad credit scores?  How did it make your life easier or harder?  Share below in the comments section.

Cash Flow Celt

I'm just a local business and finance nerd looking to help people get educated about small business, marketing, and personal finance! I write about anything and everything that I can tie into those themes. I'm also Central Florida's only Kilted Realtor, so I write about Real Estate too! Check out my About Me page to see the origins of Cash Flow Celt.

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5 Responses

  1. George Colangelo says:

    Well written! Congrats on the high credit score.

  2. Great post. I’ve encountered a lot of people who don’t understand their credit scores. Managing credit is easy if you follow a few key steps. A great credit score should be considered part of FI. After all, in a lifetime you save so much money by having good credit.

    • Cash Flow Celt says:

      I can’t agree more! Certain things are just a function of your credit, the two most notable being insurance costs and a mortgage. The home is so very important though, looking at the life of the loan, just 150 points difference on your credit could save you upwards of $50,000! And good spending and financial habits inevitably lead to a high credit score, so you’re rewarded for just doing what you should be doing anyway.

  3. Yetisaurus says:

    Nice work bringing your score up so much! I’ve always been a total nerd about mine, so it’s usually in the 810-830 range (FICO, not Vantage), and I’ve made it a goal to someday hit the 850 limit. So far my big obstacles have been that I don’t have a car loan and I don’t have enough credit cards. Sigh. Unless something changes, I’m probably going to be stuck in this range forever.

    When renting out my fourplex, I set a minimum credit score of about 660. I was able to get good applicants fast, thankfully, but I was shocked by how many people tried to apply anyway with scores in the low 500s, and other people who literally had no clue what their credit score was. One woman didn’t even know there were three different credit bureaus, and I estimate that she was in her late 20s or early 30s! With so much information out there about credit and finance, you would think everyone would know. I guess that’s part of the reason why we have personal finance blogs.

    • Cash Flow Celt says:

      I’ve always known about credit scores, but until I got my first real job I didn’t get serious about maintaining it. I never made enough money to risk buying things on credit (especially since most of my income through college was through stock trading, ergo, inconsistent). Once I had a steady income, I bought a few things on credit so I could start building my score. While hopefully never again, a car loan was the first thing I got. I put a sizable down payment on it, so monthly payments were just over a $100 a month and total interest on the loan was about $475. It was a four year loan and I’ll have it paid off this month or next – a full two and a half years early and total interest of about $145. One of the things you may consider, to put some installment credit on your history, would be furniture. I just bought a LA-Z-BOY on credit, 12 months no financing cost. I had the money up front; however, I figured why not. Cash flow management and it will put another installment loan on my history since my car is about to stop history.

      To the bit about the female renter, it’s sad. I openly advocate that anyone who goes to college should be required to take their 2000 level personal finance course. I was required to do it for my economics major, and it was the most useless class for me, but I saw how much great information it had and amount of practical learning it was. Congrats on getting that fourplex rented though!

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