Why Credit is Important

What is credit and why is it so important?

No matter how good you may be with money, a potential lender may not see your budgeting strategy or emergency savings fund—but they will most likely see your credit report. 

According to Consumer.gov, your credit report is a document created by a credit bureau that gives a summary of your credit history. Your credit history shows how much money you’ve borrowed and when, the type of credit accounts you have, if you’ve made payments on time, and more. Your credit history shows lenders how responsible you’ve been with the money you’ve borrowed (also called your creditworthiness). Your credit history plays a big part in everything from applying for an apartment to getting a mortgage. That’s why it’s so important to build credit. 

Why is it important to have a good credit score?

One way lenders determine your creditworthiness is by looking at your credit score. Your credit score is a three-digit number between 300-850 that shows lenders how likely you are to pay back your loan based on your credit history. Poor credit is typically anything below 580, while exceptional credit scores are generally 800 and above.

You can earn a good credit score credit by practicing responsible credit habits, like paying your bills on time and maintaining a low credit usage. On the other hand, poor credit history may be the result of bad credit habits like carrying excess credit card debt or having a high credit utilization ratio. It’s worth it to take steps to help improve your credit. There are many situations where a good credit history can come in handy. 

Credit can make it easier to apply for housing.

If you’re thinking about renting an apartment or house, especially in a competitive market, your landlord may check your credit score before offering a lease. A good credit score can show that you’re responsible with paying bills on time—a very important trait to a landlord who’s expecting a monthly rental payment.

Credit can help you secure loans.

Whether it’s a home, auto, or personal loan, your credit can be one factor in determining how much of a risk you are to the lender, and how likely you are to pay back the loan. Building credit history with a secured credit card can be a smart step to working on your credit score and proving you’re a good person to extend credit to. 

A good credit score can qualify you for lower interest.

Your credit score is an important factor in the interest rate you qualify for, and ultimately how much you’ll pay over the life of the loan. For example, lenders consider someone with a good credit score less risky to lend to, so higher credit scores tend to come with lower interest rates.

The reverse is also true, when you have a low credit score (or if you believe you have ‘bad credit’), a lender may charge a higher interest rate to offset the risk. Whether you’re applying for a credit card or a loan, a lower credit score can mean you’ll get a higher interest rate than someone with better credit.

Certain contracts require credit.

Even if you’re planning to pay for a new phone with money in your bank account, you still may be subject to a credit check when signing up for a new cell phone plan or contract. That’s because the mobile service provider may want to look at your payment history to ensure you pay your cell phone bill on time.

Additionally, when it comes to renting a car, you may need to use a credit card as a form of payment, rather than a debit card or cash. While there are some exceptions, car rental companies do this because they want to make sure that there are enough funds available in case the car gets damaged, or you fail to return it.

Some jobs require credit checks.

In some cases, employers may check your credit. While they can’t see your credit score, they can see your debt and repayment history. You will receive a written notification that your credit will be checked, and you have the option to deny the request, but having good credit is likely to be important for getting the job.

Credit cards may help with some types of fraud.

A credit card can be a real asset while shopping. According to the Federal Trade Commission, under the Fair Credit Billing Act protects credit card users from unauthorized charges if they notify their credit card company and it’s found that the purchases were fraudulent. Under this act, cardmembers will not be responsible for more than the first $50 of charges if the credit card issuer determines those transactions were unauthorized.

While debit card users are protected against unauthorized charges under the Electronic Funds Transfer Act, according to the Federal Trade Commission and Federal Reserve, if you don’t notify your bank within two business days, you losses could go up to $500 or perhaps much more.   

Credit cards let you earn rewards.

You can also earn while you spend with a credit card. For example, with a cash back rewards card, you can earn cash back when you spend on everyday purchases. For example, Discover credit cards include rewards like cash back or miles. Learn more about Discover rewards credit cards to find the best rewards card for you.

The importance of credit history for your credit score

Credit utilization is reported to credit bureaus once a month, which means that several months of responsible credit card usage can help you establish credit history. Credit of all forms can not only help you build good financial habits for the future, but a solid credit history can be an important tool to help you accomplish whatever goals you may have.