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Why Credit is Important

Last Updated: May 10, 2023
5 min read

Key points about: the importance of credit

  1. Your credit score is important because it can determine whether you qualify for a credit card or loan.

  2. If you're looking for a new job or place to live, landlords and employers may look at your credit history.

  3. Credit cards have fraud protections not found on most debit cards and may allow you to earn rewards when you spend.

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 and manage it responsibly. 

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 missing credit card payments 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 loan, auto loan, 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 may require credit checks

In some cases, employers may check your credit. While they can’t see your credit score, they can see the information that contributes to your credit score, including your debt and repayment history. You’ll receive a notification that an employer wants to run a background check, or background screening, and they must have your written permission to do so, according to the FTC. You have the option to deny the request, but having good credit may 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, 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.

Did you know?

Discover cardmembers are never responsible for unauthorized purchases on their Discover card.2

Credit cards let you earn rewards

You can also earn while you spend with a credit card. Depending on the 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 help you build good financial habits for the future, and a solid credit history can be an important tool to help you accomplish whatever goals you may have.

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  1. Build credit with responsible use: Discover reports your credit history to the three major credit bureaus so it can help build/rebuild your credit if used responsibly. Late payments, delinquencies or other derogatory activity with your credit card accounts and loans may adversely impact your ability to build/rebuild credit.

  2. $0 Fraud Liability: An “unauthorized purchase” is a purchase where you have not given access to your card information to another person or a merchant for one-time or repeated charges. Please use reasonable care to protect your card and do not share it with employees, relatives, or friends. Learn more at Discover.com/fraudFAQ.

  • Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.