April 14, 2021
If you’re just starting out, you might not realize how much a good credit report and solid credit score influence your access to regular things—like buying a smartphone or insuring your car (separate from your parents). The reason? If you don’t have a good credit score, or much of a credit history, lenders and insurers don’t know if you’re a reliable borrower or if you’ll be able to pay your bills regularly over time. That’s why they perform a credit check when you apply for an apartment rental or a car loan. They may run one of two types of inquiries: either hard, which can affect your credit score; or soft, which does not. Ask which one they’ll use.
If your score isn’t up to snuff, lenders might raise an interest rate, refuse to sell or loan to you, or require a co-signer. What is considered a good credit score? Generally a FICO score of 740 or above is considered very good (the top limit is 850). A score in the 670 to 749 range is good. FICO experts say many consumers are increasing their understanding of their credit behavior and how it affects their score—that’s a positive trend.
But in case you’re unsure of your credit score’s role in your life, read on for six ways boosting your credit score helps you.
A good credit score for loan approval might not be surprising, but a good score also means you may qualify for a more favorable interest rate, too. Lenders try to predict the likelihood of you defaulting on loan payments, and a poor credit score makes you look risky to them. They may charge higher interest rates as a result.
Factors that influence your interest rate include your credit score and history, loan term (longer is less favorable), amount of down payment (more is better), your income, debt-to-income ratio, and the lender itself — because each one has its own criteria. Work on boosting that score (it can take time) if you plan to buy a car sometime down the road.
Many insurance companies rely on a “credit-based auto insurance score” when deciding whether to insure your car and what your policy rate should be. This score is a little different from a regular credit score, but the two usually correlate based on your payment behavior. In most states, a favorable auto insurance score can help you capture a better insurance rate.
Here’s how it works. A regular credit score predicts how likely you are to miss a payment in a 24-month window (at least 90 days past due). The insurance score predicts how likely you are to file a claim. Both are influenced by good payment behavior, and insurance companies pay attention to both. A history of on-time payments, low credit card balances and well-established credit history demonstrate you’re a good risk.
State policies vary — some restrict how insurers can use credit information. And, generally, insurers aren’t allowed to use an auto insurance score as the only factor in deciding your policy rate. But good credit behavior will benefit you anyway.
Like car loan lenders, your landlord or property management company wants to know you’re good for on-time and consistent rent payments. That means they’re likely going to run a credit check alongside your rental application to learn about your financial habits. They’re not loaning you money, of course, but a strong score and credit history gives them peace of mind.
It’s also worth checking your credit report ahead of time to correct any mistakes you find, and to learn your score so you have some idea of the likelihood your application will be accepted.
Unless the apartment or house you rent comes with utilities included in the rental fee, you may need to put gas, electric or water accounts in your name. Each utility will likely run a credit check. If you’re a new customer or you have a history of late payments, the utility may require a cash deposit that could be up to two times the amount of the typical bill, depending on the state. Alternatively, it might require a letter of guarantee from someone willing to pay the bill if you can’t.
A short credit history or poor credit doesn’t necessarily mean you’ll be denied utility service. It just means you might need to make a deposit or have someone with better credit serve as a guarantor.
Newer smartphones tend to be expensive, and many people opt for a payment plan rather than making a one-time, in-full payment. So you might be surprised to learn that you likely can’t set up a payment plan for a new smartphone on your own plan without a credit check. Why? The phone companies — the big ones, anyway — want to be assured you can handle the installment plan for your new phone as well as the phone contract.
Many employers don’t check your credit history or credit score, but if you’re applying for a managerial position or a job handling finances or sensitive data, the employer might check to get a sense of your aptitude for handling financials. With your written permission, employers usually run soft inquiries and won’t see all credit information, like account numbers or spousal information. They’re required to let you know if your credit report prevented you from getting the job.
A good credit score usually takes time to build because it reflects your payment history and types of credit you hold. Raising it requires good habits over time.
Pay your bills early or on time. A track record of on-time payments is a solid way to earn a credit score in the 700-800 range.
If you miss a payment, pay it as soon as possible.
Avoid charging too much on a credit card to keep the credit utilization low (generally, charge no more than 1/3 of your card’s limit).
Check your credit reports with all three reporting agencies to make sure they’re accurate and current. Because of the pandemic, Experian, TransUnion and Equifax are offering all US consumers free weekly credit reports through AnnualCreditReport.com through April 20, 2022. You can also learn what types of accounts are reported. For example, utility and cell phone bills typically aren’t.
Look for ways to establish credit. Having a credit card in your name is one of the quickest ways to jumpstart a credit history. Student loans in the borrower's name also contribute to that history.
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