Before we get into why a credit score is important, let’s break down what a credit score even is. A credit score is a three-digit number based on a person's credit files that’s used to determine their creditworthiness. (Psssst - want to know more about credit scores? We have an article for that.) Lenders like banks, credit card companies, and landlords use credit scores to predict how likely it is that a person will repay their debts. So, how can this simple number significantly affect your financial life in so many ways?
Lenders will use your credit score to judge how risky lending to you would be, then decide how likely you are to repay the borrowed amount. So, in a classic chicken-or-the-egg situation, having good credit makes getting more credit easier. A good credit score can increase your chances of getting new credit approval, like for a mortgage, car loan, or a new credit card. When you have a good credit score, lenders are more likely to offer you better terms and interest rates because you’ll be considered a low-risk borrower. Lower interest rates can save you a huge amount of money over the life of a loan!
A good credit score and credit history could also mean lenders being more likely to extend you larger credit limits. A credit limit is the maximum amount of money you can spend on credit, which a lender will determine based on your credit score, income, and credit history. The higher the credit limit, the more purchasing power you have.
Employment: In today's competitive job market, employers commonly conduct background checks on potential candidates. As part of this process, some employers can opt to review credit reports to see how financially responsible a candidate is. A good credit score tells employers that this potential employee can manage their finances and meet their financial obligations. This info can be especially relevant if the open position involves handling company finances.
Renting a home: Landlords are always on the hunt for reliable tenants who can consistently pay their rent on time. To judge the financial reliability of potential tenants, lots of landlords rely on reviewing an applicant's credit report to learn important info on their past financial behavior, like their history of making prompt payments. A good credit score shows that the tenant is financially responsible and is likely to pay their rent on time, helping landlords make informed decisions about who to rent their property to.
Now that we’ve talked about what a credit score is and why it’s so important, let’s talk about how to improve it.
Pay your bills on time: Making your payments on time is the key to keeping a good credit score. Consistently paying your bills by their due dates also shows financial responsibility and reliability to lenders, helping you score better credit limits and interest rates. Late payments, on the other hand, can not only lower your credit score, but also make lenders wary of extending you credit.
Keep your balances low: Managing your debt responsibly is also clutch to credit building. Having high balances on your credit accounts can bring your credit score down, showing lenders you’re a higher risk. Keeping your balances below your credit limits, however, shows lenders that you’re using your credit responsibly and not just relying on borrowed funds.
Don't close unused credit cards: Unless a credit card has an annual fee, still has unpaid debt, or is causing you financial strain, don’t close it. Closing a credit card account can hurt your score because it reduces the overall amount of credit available to you, which can increase your credit utilization ratio. Your credit utilization ratio is the percentage of your available credit that you’re currently using. A higher credit utilization ratio might mean a lower credit score. We know how confusing this can all be, so we put together a little credit-building crash course.
Only apply for new credit when necessary: Applying for too many credit cards in a short period of time can negatively impact your credit score because it can show lenders that you’re in a financial bind or are taking on more debt than you can handle. When you apply for credit, a “hard inquiry” is made on your credit report, which can slightly lower your credit score each time. A “soft inquiry,” on the other hand, doesn’t typically impact your credit score. A soft inquiry happens when you’re not applying for credit but still need your credit score checked, like if you or a potential employer are checking up on your credit score, or if you’re looking to get pre-approved for a loan and doing a little rate shopping. So, only apply for new credit when you really need it and always think about how it impacts your creditworthiness.
Use a secured credit card: A secured credit card is a card that lets you set your own credit limit by making a cash security deposit when you open the account. It can be a great starter card as you gain experience with the best ways to use a credit card and how to keep making your payments on time. Opening a line of credit with a traditional credit card, or "unsecured" credit card, can sometimes be harder if you don't have any credit yet, or if you have not-so-great credit. A secured credit card, on the other hand, can be easier to open and keeps the stakes lower and slower for your credit-building journey. Speaking of secured credit cards, did you know the GO2bank Secured Visa® Credit Card1 has no annual fees2, no credit checks, and credit limits starting with security deposits as low as $100? There’s no time like the present to get your credit going with a go-to on your side!
The views and opinions expressed here may not represent the views and opinions of GO2bank, Green Dot Corporation, or its affiliates. It is presented for general informational purposes only and does not constitute tax, legal, or business advice.