Why is credit important? (2024)

When it comes to credit reports and credit scores, you’ve probably heard a lot of advice over the years. And while you might know that financial professionals recommend working to establish good credit scores, you may not be clear on the reasons why credit is so important.

We’ll explain the impact your credit reports and scores can have on your financial life. You’ll also learn what credit rating qualifies as a good score, along with expert tips on how to build credit for the first time.

What is credit?

Credit is a term that has several different definitions in the world of finance. Credit can refer to the records that the credit bureaus maintain of how you’ve managed your financial obligations in the past. These records are also known as credit reports.

Another meaning of the term credit can be your credit score. A credit score is a tool that lenders use to assess your risk as a potential borrower. Developers designed credit scoring models to analyze the details on your credit report to determine the likelihood that you’ll pay future bills late (by 90 days or worse) in the next 24 months.

Finally, credit can also refer to money you borrow from a lender, credit card company or some other financial institution. In order to access this financing, you must satisfy a lender’s qualification criteria and promise to repay the money you borrow over time (usually with interest and fees).

What’s the difference between a FICO Score and a VantageScore? We’ll explain what you need to know.

Why credit is important

The ability to access financing can be empowering when you approach the process in a responsible manner. An affordable mortgage, for example, could enable you to become a homeowner rather than renting — giving you the ability to purchase a valuable asset that can increase in value over time.

Good credit is important because it can help determine whether you’re eligible to borrow money and access many essential needs in life, such as reliable transportation and affordable housing. Credit also plays a role in how much you pay for financing when you apply for loans, credit cards and more. In some cases, the condition of your credit report could even influence your ability to land a job or a promotion.

What is a good credit score?

Most credit scores range from 300-850. Most top lenders in the United States use FICO® Scores when making credit decisions. A good FICO Score falls between 670-739. Any FICO Score of 740 and above is either “very good” or “exceptional”.

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If your credit report shows a history of poor credit management habits (e.g., late payments, high credit utilization ratios etc.), a credit scoring system could predict that you’re more likely to pay future bills late too. As a result, you may earn a lower credit score and lenders may charge you more or be unwilling to approve you for financing until you fix your credit problems.

Benefits of having a good credit score

Good credit can help you access valuable benefits. Below are some of the most common examples of perks you may be able to enjoy when you establish a good credit score.

• Better approval odds: With a good credit score, lenders and credit card companies are more likely to approve your applications for loans, credit cards and other types of financing. It may also be easier to qualify for apartment leases, new utility accounts, mobile phone services and more when you have good credit.
• Lower interest rates and fees: Lenders typically offer more attractive interest rates to applicants with good credit scores compared to higher-risk borrowers. If your goal is to qualify for the best rates available, many lenders look for credit scores of 760 or higher.
• Lower insurance premiums: In many states, your credit can affect your auto insurance premiums. A good credit-based insurance score might help you save money on your auto insurance rate.
• Reduced financial stress: Knowing that your credit won’t hold you back when you need to apply for new financing, an apartment or even a new utility or mobile phone account can be a relief. It’s also empowering to know that the good credit you’ve worked hard to earn could save you money on a monthly and yearly basis in the form of lower interest rates, lower deposits and more.

Tips for building credit

Learning how to build credit for the first time or how to rebuild your credit after a setback can sometimes feel overwhelming. Yet although building credit may take time and consistency, it doesn’t have to be difficult if you understand how to approach the process.

• Review your credit reports: Start by checking your three credit reports from Equifax, Experian and TransUnion. Review your credit reports for accuracy and if you discover any errors, be sure to dispute them with the appropriate credit bureau.
• Establish positive credit: If you don’t have enough current credit established, it may be helpful to apply for accounts that could give you the opportunity to establish a positive credit history with the three major credit bureaus. The right types of credit cards may be a good fit for your first accounts as well as credit builder loans.
• Manage your credit responsibly: Once you establish new credit accounts, it’s essential to manage them with care. On-time payments are a must. You also need to pay attention to your credit card utilization ratio. (Credit utilization is the relationship between your credit card limits and balances — the lower your credit utilization ratio, the better).

There are other factors that influence your credit score as well. But the longer you practice the good habits above, avoid mistakes and allow your length of credit history to grow, the better your credit score will typically become over time.

Frequently asked questions (FAQs)