What’s a credit score? What’s a very good credit score?
These are some of the questions that I hear when I talk about credit scores to people I know.
Apparently, some people just don’t care about their credit scores. But if you do care about it, then you’re in luck!
To save you a ton of research, I’ve written below the reasons why you should aim for a very good credit score in your personal finance journey!
And to give you more value, I also made points on how you can build a great credit score as well.
If you’re ready to know the importance of that three-digit number, let’s get right to it! 🙂
10 Reasons To Aim For A Very Good Credit Score This 2020
A credit score is basically your credibility when it comes to banks and creditors.
It’s a three-digit number wherein the higher the digit the more credible you are. Credible in the context of your capacity to pay off loans or debt.
The most commonly used credit score range would be FICO’s:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Excellent
Generally, a good credit score is anything above 700. According to Experian, a credit score of 670+ already gives you the opportunity to get the best interest rates and terms.
Why Do Credit Scores Matter?
By having a high credit score, you can leverage that to get excellent deals when it comes to your loans, credit cards, real estate, and even your phone plans.
Having a bad credit score will put you in the category of having just regular interest rates and fees. This will make your debt payments difficult because of the high interest rates.
Before we discuss the reasons to achieve a very good credit score, it’s only right that we first talk about how to build it first.
4 Tips To Build Your Credit
1. Pay What You Can Afford
When you’re starting to build credit, don’t expect the lenders to give you the best offers immediately.
You need to build that trust and have a clean track record.
To start off, you should only use your credit cards on things you can afford to pay.
If you live with that principle, trust me, it’s going to boost your score up!
If you only purchase things that you can pay, then that means you don’t have to worry about late fees and paying only the minimum. This act alone makes up 35% of your overall credit score!
Payment history has the biggest percentage when it comes to credit scores. So this is what your creditors will prioritize when checking your score. A good payment history tells the lenders that you’re a responsible borrower.
2. Don’t abuse your credit card
A credit card isn’t a permission slip to spend lavishly on things. It’s a tool for you to make transactions easier, to earn rewards, and build credit.
The ratio of your outstanding balance and your credit limit also has a big influence on your credit score. That ratio is called a credit utilization ratio.
Credit utilization shows how much of your credit card are you using.
For example, you have a credit limit of $1,000 and you’re current balance is $100, then your current credit utilization is at 10%.
To calculate for your credit utilization: (credit card balance/credit limit) x 100
It’s commonly recommended to only have a credit utilization ratio of about 30% or less. Creditors/lenders look at this aspect of your credit card because the level of debt that you’re in is considered as a future indicator of credit card performance.
3. Start Early
If you have the luxury to start building your credit score at an earlier stage in your life, then go for it!
That’s one of the things that I would’ve done when I was in college. Did you know there’s a credit card that’s made for students? Student credit cards are an excellent start to build credit while your still studying.
These cards also give out perks that benefit the student. Check out this list of best student credit cards for 2020!
Friendly reminder: Only avail this credit card if you’re 100% sure that you can manage it properly!
4. Setup payment reminders
Late payments will reflect on your credit history so set up a reminder of your payment period. Use sticky notes, set up alarms and calendars – better yet, set an automatic payment on a certain date every month! This will ensure that you’re only spending what you can afford and never be late on any payment!
Not only does late payment reflect on your payment history, it also has fees!
As I’ve mentioned in my previous post, here are the categories that affect your credit score:
- Payment History (35%)
- Amounts Owed (30%)
- Length Of Credit History (15%)
- Credit Mix (10%)
- New Credit (10%)
Why Do We Need To Build Credit?
That’s a good question to ask. Sure you can go through your 20s without credit cards – you’re a cash-only person and there’s nothing wrong with that.
But there comes a time in your life that you need to purchase a house or a car. Good for you if you can pay with cash upfront but that’s not the case for everyone.
I’ve known people who were cash-only but when they needed a bigger amount of money for a purchase, they couldn’t loan from the bank since they have little to no credit history to begin with.
A good plan would be to build a healthy credit score and maintain it there even if you don’t need a loan yet. But just in case you do, you’re more than qualified to receive the best offers.
Now that we’ve talked about how to build a credit score, what comprises it and why is it important, it’s now time to tell you the reasons why you should aim for a very good credit score!
1. Lower Interest Rates
If you have a healthy credit score, your lender gives you the best offer because they know that you can pay your debts on time.
With having low-interest rates, you get to pay back the loan faster and also continue building up your credit score.
That’s why if you’ve built a good credit history in your early 20’s, you can have the best deals when you’re nearing your 30s – a time you’re starting to rent out apartments or buy a house.
With lower interest rates you lessen the risk of you going default. Plus, you also have the opportunity to save more money.
2. Better Chances Of Renting An Apartment
Yep, credit scores are sometimes checked by the landlord if you’re qualified to rent. The landlord checks this because he/she would like to gauge if you can pay your rent on time.
According to this article, a FICO score of 620 can be considered as fair credit to land an apartment. But of course, you don’t settle for that number. You should aim for a higher credit score so that the process of finding and acquiring an apartment would be a lot easier.
3. You’ll Be More Financially Prepared
If you’ve managed to attain a good credit score, then asking for loans with good deals will be easier.
As mentioned earlier, you’ll reach a point wherein you’ll need to pay a big amount of money upfront and if you don’t have a credit history then borrowing from banks can be difficult.
Even if you settle for peer to peer lending, they also look at credit scores if a person is qualified for the program.
Peer to peer lending isn’t as strict as the banks. People with relatively low credit scores can go to p2p lenders if to see if they are qualified.
If you’re looking for the best p2p for 2020, you can check out that list!
4. Better Chance of Getting Approved For A Credit Card
With a proven track record, an excellent credit history, creditors are more than happy to let you apply for a credit card.
They’ll give you the best interest rate that they can offer – the best rewards and cash backs.
Some credit cards will give you as high as 6% cashback when you shop or do your groceries. Others will even give you 2x miles reward for every purchase using their cards.
The reward can go from earning points in the gas station to any everyday purchases! Check out the best rewards for credit cards this 2020!
Although creditors don’t look at credit scores alone, it’s still a big factor that they consider. Additional things they also look at would be an applicant’s income and current debt.
5. Business Loans
There may come a time that you want to expand your business or even just start one. When that time comes, your credit score should be in top shape.
According to a post of CNBC, they wrote that the Small Business Administration’s 7(a) loans increased from 2014 to 2018.
The 7(a) loan is the program of SBA to provide financial assistance to small businesses.
Even though this loan was increasing in numbers, not everyone who sought such a loan was approved. Even with the robust numbers, there are still a lot of small business owners that had less than good credit scores that got declined.
If you’re a business owner, here are few tips that you can do to boost your credit score fast:
1. Pay bills on time – Even if you can’t pay full, just make the effort to pay your debt on the payment period. Late payments don’t just affect your credit score but it also adds up to your payment since it has fees.
2. Register your business – Banks are more likely to give out loans to small businesses when they are established and have different types of bills named to the business.
3. Generate money – Although this might be a no-brainer when it comes to business, it’s a factor that banks look at as well. As mentioned earlier, they don’t just focus on credit scores, they also look at different things. Plus, a bank will be more likely to hesitate to give out a loan if a business is just starting out and isn’t generating enough money.
4. Separate personal and business bank account – This is done so that the company can have a separate credit record of paying bills on time. If you can afford it, you can even have a company credit card. Just spend some business purchases on that card and make sure that you pay on time. No matter how small, it still reflects on your record.
6. Investing In Real Estate
As mentioned earlier, a person’s credit score can be a measure of his credibility. In the world of real estate, a credit score can act as leverage for people who wants to invest in a property.
Having a good score enables the investor to refinance rates and negotiate terms and conditions when seeking a loan.
In an article by Fortune Builders, their first step when thinking of getting a real estate loan would be to check your credit.
They quoted Ken Chaplin of Transunion saying credit score is an important factor when it comes to the process of buying homes. “It will determine the size of the mortgage payment to the interest rate of a loan.”
So this just means credit scores can provide excellent deals, save you money and give you multiple options to have the best real estate conditions.
Since most mortgages are extended by borrowers, banks always look for people with good credit scores because they are considered low-risk candidates and has the potential to pay off the extended mortgage.
7. Faster Access To Personal Loans
Personal loans can affect credit scores since it adds up to your debt. But it’s important to note that your payment history has more weighting on your credit score than acquiring a new loan.
Taking out a personal loan might temporarily affect your score but if you’re a regular payer and you pay on time, then it’s only natural for your score to come back up. Plus those new payments add up to your credit history solidifying your credibility.
Being on time with your payments gives a positive effect on your score since it just shows that you can handle debt responsibly.
If you also are presented with a great opportunity but you need cash to take advantage of it, having an existing very good credit score will make the process of loaning out money easier!
8. Employer Check
It seems like when you apply for a job, your resume and cover letter aren’t just the important things.
A research done by HR,com shows that 95% of the companies in their study conduct some type of employment background screening, and 16% of them look at the financials of future employees!
If they are checking your credit history – this just means they’re looking at the types of credit accounts you have, how long have they been open, are you paying on time and how much is your debt.
According to CNBC, a possible reason why employers check on your financials would be for security purposes. They do it to verify identity, and to know whether you are “responsible”.
But the bright side of this checking process is that if they do this, then most probably they are already thinking of hiring you.
When they check your financials, they can’t see your credit score but your credit history can give them a snapshot or an overview of how you are doing financially.
9. Best Rates On Car Insurance
Having a good credit score can also help you with the best insurance deals.
According to Nationwide, half of their customer pays a lower premium based on their credit score.
Although credit scores aren’t the only thing insurance companies look at, it’s still a great idea to keep your score in a healthy bracket.
10. Better Cellphone Plans
Most cellular providers look at your credit history and credit score to determine how much cash should you pay upfront.
With bad credit, your plan might be limited to some features. That initial deposit will serve as a “safety net” for your provider if you can’t pay in the future.
Should You Aim For A Good Credit Score?
My answer is an astounding YES!
There are others who think that they are fine even with bad credit, I mean it’s kinda okay but it won’t get any easier for you.
The interest rates won’t go down, you’re almost always be required to do a security deposit, and probably the most significant disadvantage would be the difficulty of getting approved for personal and real estate loans.
Remember that building a good credit score is a process, it can’t happen immediately. Be patient, pay your bills on time, purchase only what you can afford, and watch that three-digit go up!
Let me know what did you do to increase your credit score? Let’s talk about it below! 😀