Why Having Good Credit is Important

Boom Team

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November 22, 2022

What is a credit score?

Credit is the trust you build that proves your reliability to pay back the money you borrow on time. Your credit score is a numerical representation from 300 to 850 of this reliability, and lenders ultimately use this score to understand if they should lend to you, and under what terms. 

How is your credit score calculated?

Your credit is calculated in a few ways. Three credit bureaus- Equifax, Experian, and TransUnion provide a credit report which tracks and maintains your detailed credit history across important credit factors like credit card and loan repayments and use a proprietary algorithm to provide a credit score based upon their data and have custom credit scoring models. While these three credit agencies are the primary source of your credit history, most lenders use FICO scores (instead of the scores from Equifax, Experian, and TransUnion) to assess your reliability as a borrower. FICO is a company which aggregates data from the agencies to provide their own credit score - the “FICO score.” Unlike the three credit bureaus, FICO does not provide a credit report. While Equifax, Experian, TransUnion, and FICO all have unique credit scoring models, higher credit scores are always better.  

What metrics determine your credit score?

Despite using slightly different methods of credit scoring, all credit scoring companies track similar metrics over time:

  • Payment history (whether you make on time payments)
  • Credit utilization rate (the available credit you’ve used)
  • Credit age (how long you’ve had credit)
  • Credit mix (the types of credit you have)
  • Credit inquiries (the number of times you’ve applied for new credit)  

What's a good credit score?

If you’re wondering what a good credit score is, as a rough rule of thumb, a score above 670 is generally viewed as “good credit.” However, the average FICO score in 2022 is 714. And, as you can see from the FICO credit score ranges, a "poor" credit score is usually a score lower than 570, a "fair" credit score is between 570 and 670, a good credit score is between 670 and 740, and a great credit score is between 740 and 800. Excellent credit scores range between 800 and 850.

As a rule of thumb, you want your credit score to be in the "green" area

How can I check my credit score?

Given the different credit scoring models and credit scores, checking your credit score and credit report can seem confusing, so we're here to help you break it down and determine the best sources for this information.

  • First, you're entitled to a free copy of your credit reports from the three credit agencies every 12 months, which you can access at https://www.annualcreditreport.com. However, these reports, though they contain detailed information of your credit history, the information from the agencies often don't contain a credit score.
  • Second, you can use a free credit scoring services like Credit Karma, and Equifax. While you can also get your credit score directly from FICO, they do not offer a free credit score.
  • Finally, you may be able to get a credit score from your credit card issuer or another financial institution, or other loan statement.

However you decide to check your credit, we recommend checking your history once yearly and using a free score checker at least every four months to stay on top of your credit.

Why is a good credit score important?

Your credit score - the single number which reflects your credit history - shows how you’ve managed debt in the past and lenders use it to predict your future financial behavior. A good credit score not only shows financial responsibility, but also saves you money and provides flexibility when you need it most. 

Good credit saves you money

Borrowing money is cheaper

With good credit, it’s cheaper to borrow money because lenders provide lower interest rates on your debt. The chart below shows estimates of the money you could save with different loans by having good credit (compared to “Poor” and “Fair” credit).

You’ll get the best insurance rates

A good credit score tells insurance providers that you handle money well, and this tells them you’re a low-risk investment. That means you’ll get favorable rates and lower premiums on things like car and homeowners’ insurance.

You can sometimes forego security deposits

Some living expense providers - including utilities, telephone, and cell phone service providers - will run a credit check. Having good credit not only speeds this process up, but also may enable you to forego providing security deposits on these services. 

You’ll qualify for better rewards credit cards

Everyone likes perks, and with good credit, you’ll qualify for better rewards credit cards which offer things like cash-back rewards and points available for travel redemption.

Good credit gives you flexibility when you need it most

You’ll have an easier time renting an apartment

Landlords will run a credit check on potential tenants, and a good credit score makes you more likely to get approved more quickly.

You’ll get credit approval more easily

In addition to getting better loan terms, you’ll get credit applications approved more quickly and with higher credit limits, saving you time and providing peace of mind. 

You’ll get jobs more easily

Employers may pull a credit report as part of a background check, especially if the job involves handling cash or managing personnel files. A good credit score makes you more likely to get employed. 

To recap:

  • Your credit score is a numerical representation on a scale from 300-850 that suggests how reliable you are when it comes to paying back borrowed money. While there are a few agencies that calculate their own credit scores, the higher the score, the better. 
  • Having a good credit score is important: it saves you money, time, and provides flexibility when you need it most.
  • You don’t have to have excellent credit scores. Even an improvement from a poor credit score to a fair credit score or good credit score can save you thousands of dollars yearly. 

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