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.
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.
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.