October 25, 2024

Having Good Credit: What It Means and Why It Matters

Your credit score is a small number with a big impact. It has the power to make or break many of life's most important financial decisions.

Having good credit helps you secure loans with great terms and low interest rates, which can save you thousands of dollars. But the perks of good credit go beyond loans, creating a lasting sense of financial security and comfort.

A score that's less than ideal, on the other hand, makes loans harder to get and more expensive. With a poor score, you can expect to face higher interest rates and limited options for credit cards and loans. In some cases, it can even affect your housing and job prospects.

Here's a guide to the factors that go into calculating your credit score, why it's so important, and how to keep yours in tip-top shape.

What is a good credit score?

Your credit score gives lenders a quick way to gauge how responsible you are with money. But what exactly counts as a "good" score? It depends on who you ask.

There are two main credit scoring models: FICO and VantageScore. Both use a scale from 300 all the way up to 850 (and no higher), but they have slightly different ideas about what makes a score good or bad.

Here’s a quick guide to how each model rates your score:

Rating	FICO	VantageScore
Exceptional/Excellent	800–850	781–850
Very Good/Good	740–799	661–780
Good/Fair	670–739	601–660
Fair/Poor	580–669	500–600
Poor/Very Poor	300–579	300–499

But why does having a good credit score matter in the first place? It's simple: a high credit score opens doors to better financial opportunities. The better your score, the more lenders, credit card companies, and other financial institutions are likely to view you as a reliable borrower. A less favorable score can considerably limit your options.

Why is good credit important?

Your credit score has a serious impact on just about every aspect of your financial life. But what does good credit do for you, exactly? Some of the main benefits include:

Easier approval for financial products

Good credit clears the way when applying for financial products. Lenders view high-scoring applicants as less risky, which often leads to quicker approvals for loans and credit cards. This increased trust from lenders is particularly helpful when you want to borrow money or access credit for major purchases or investments.

Lower interest rates on loans and credit cards

One of the most tangible benefits of good credit is the potential for lower interest. When lenders see a strong credit history, they're often willing to offer better rates. Even a small interest reduction can mean significant savings, especially for long-term loans like mortgages.

Access to premium financial products

Good credit paves the way to a wider range of financial resources. These premium products offer tangible benefits like cash back, travel miles, and higher credit limits for large purchases.

More housing opportunities

A high credit score can make a real difference when you're looking for a new home. Many landlords want to see your credit score as part of the application process. A strong credit score helps you stand out as a reliable tenant, which can give you an edge in competitive rental markets. And if you're looking to buy a home instead of renting, good credit helps you qualify for a mortgage and land more favorable terms.

Better insurance rates

Many insurance companies use credit scores to calculate premiums for home and auto insurance. The logic is that people who manage their credit well are likely to be more responsible in other areas of life, including driving and home maintenance.

Factors that affect your credit score

Models like FICO and VantageScore calculate based on critical factors in your financial life. Understanding them helps you make smart choices to maintain or improve your score.

Let's take a closer look at what goes into calculating your credit score:

Payment history

This is the most important factor, and it boils down to one key question: Do you pay your bills on time? Late payments, missed payments, and accounts sent to collections all hurt your score. On the flip side, a long history of on-time payments can give you a serious boost. While a single late payment can affect your score, the impact reduces over time if you get back on track.

Amounts owed and credit utilization

Amounts owed considers the total amount of debt you owe. It also includes a very important concept called credit utilization, which looks at how much available credit you use at any given time. For example, if you have a credit card with a $1,000 limit and you've spent $300, your utilization is 30%.

It's a good idea to keep your utilization below 30% across all your credit accounts. High utilization tells lenders that you've already taken on more debt than you can handle.

Credit mix

This factor looks at your variety of credit types. Lenders like to see that you can handle different types of credit responsibly. This might include a mix of revolving credit (like credit cards) and installment loans (like a car loan or mortgage).

Length of credit history

This investigates the age of your oldest account, the age of your newest account, and the average age of everything put together. The longer your credit history, the better, since it gives lenders more data for assessing your borrowing habits. If you don’t have a credit history yet, there are easy ways to start building credit for the first time.

Recent credit checks

When you apply for a new line of credit, it usually results in a hard check on your credit report. Too many checks in a short time can lower your score because it might look like you're taking on a lot of new debt quickly. But the impact of each one is usually small and fades after about a year. It's worth noting that checking your own credit (referred to as a soft check) doesn't affect your score.

How to build good credit: Top 5 tips

Good credit doesn't happen by accident. It takes deliberate action and smart habits. Here are six powerful strategies to help you build and keep a strong credit score:

Pay more than the minimum. While it may be tempting to stick to the minimum payment on your credit cards, paying more reduces overall debt faster and shows lenders you're financially responsible.
Don't close old accounts. Consider keeping old accounts open, even if you don't use them often. They’re part of your credit history.
Set up automatic payments. Life gets busy, and anyone can forget a due date from time to time. By setting up automatic payments for your bills, you'll always pay on time.
Use credit responsibly. Keep your credit utilization low by using only a small portion of your available credit. This shows lenders you use credit, but don’t rely on it.
Keep an eye on your credit reports. Regularly check your credit reports for errors and signs of identity theft. You're entitled to one free report from each major credit bureau every year, and EarnIn’s free Credit Monitoring service gives you instant access to your Vantage Score 3.0.

Take control of your credit with EarnIn

Achieving and maintaining good credit is key to unlocking better financial opportunities, from lower interest rates to easier loan approvals.

With EarnIn, you can stay on top of your financial health with free Credit Monitoring and access to your earned wages when you need them. EarnIn’s Cash Out tool lets you access up to $150/day andup to $750/pay period of your pay as you earn it with no credit checks, no interest, and no mandatory fees.

Take charge of your credit. Start monitoring your score with EarnIn today.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.