The advantages that come with building a good credit score
Sep 20, 2021
4 min read
What we'll cover
Why credit scores are important
Purchases that are affected by credit scores
Resources and calculators to reach your financial goals
You’ve probably heard all about the importance of credit scores. If you've ever sought financial advice, improving your credit score was likely one of the top suggestions you came across. But what doors can a high score help you unlock?
Why a good credit score matters
Banks use your credit score as one of the factors to determine how well you manage debt. A score above 700 is generally considered good and indicates to potential lenders that you can be trusted to make steady, on-time payments.
Low credit scores are often the result of missed or late payments, which imply you haven’t always successfully managed your debt. Another factor that can lower your credit score is being overleveraged or consistently using a high ratio of your debt. This is often referred to as maxing out your credit. In fact, having a lot of credit available (think, high credit limits) can be a good thing and can actually help you build your credit and improve your score. The trick is to maintain a low utilization of your credit limit. Having large amounts of credit available — but only using a small ratio — indicates strong debt management. For example, if you have three credit cards, each with a $1,000 limit, you have $3,000 of available credit. If you max out all three cards and make minimum payments, you have a high utilization of your credit limit. Conversely, if you're only using $500 of that $3,000 available credit, you have a low utilization. Low utilization and paying more than your minimum payments tend to produce higher credit scores.
When the time comes and you need to borrow money, having a high credit score can come in handy and communicate your financial stability, specifically in the following situations:
Buying a home is one of the most exciting (and likely largest) purchases you can make. If you want to buy your first home, qualifying for a loan is often an important first step. A good credit score will help you get approved and qualify for a mortgage with a competitive interest rate from a lender like Ally Home.
Qualifying for a loan isn't the only benefit of a strong credit score. Higher credit scores will also help you qualify for lower interest rates that will help you save big over the life of your loans. For example, a $200,000 house with a 30-year mortgage at 4.75% would rack up $175,586 in interest payments. The same purchase with a 2.75% interest rate would amount to $93,934 in interest. While that 2% may not sound like much, over a 30-year mortgage, the difference amounts to over $80,000.
Refinancing student loans, auto financing or a mortgage can help you lock in lower interest rates and pay down debt more efficiently. Your edit score is an integral tool in gaining access to the best rates. Although lenders each have different requirements when it comes to refinancing, a solid credit history offers an undeniable advantage and will give you greater flexibility to qualify for refinancing opportunities.
Before you drive off the lot in a new set of wheels, a finance provider like Ally Auto will check your credit score as one of the factors it uses to determine eligibility and rates. You don’t need a perfect credit score to buy a car, but a good one can help you secure financing with a lower rate.
Some auto insurers use your credit score to predict risk and determine your eligibility as a policyholder, so a good credit score may help you secure a lower premium (the amount you pay on a regular basis).
As your credit score improves, you may have lower your interest rates on any finance charges that accrue on outstanding balances. A high score can also help you qualify for credit cards that offer rewards or cash-back programs, which tend to have more stringent qualifications. By continuing to build your credit, you may find better options to choose from in terms of interest rates and rewards, whether you prefer cash back or points toward things like travel.
A good credit score can give you more housing options as well. Landlords often look at your credit history to predict how consistently you will pay rent. If you have a lower credit score, you may have a harder time locking down a lease. A good credit score positions you as a dependable tenant, giving you a better chance at beating out the competition and renting your ideal space.
Moving to a new place? You’ll probably have to apply for utility services (like water, gas and electricity). Companies will look at your credit history to see if you’ve paid your utility bills in the past. The better your credit score, the easier it will typically be to secure these services.
You’ve got this
Building and maintaining a good credit score is one of the most important things you can do for your overall financial health. Even if you’re not taking out a mortgage today or buying a car tomorrow, a good credit score will have you ready to crush your financial goals when the time comes.