4 Reasons Why Your Credit Score Is Important (2024)

Today’s post is from our regular Wednesday contributor, Erin.

When’s the last time you stopped to think about your credit score? Or the last time you thought about how your spending habits might be affecting your score?

Probably not often. Credit scores seem to get overlooked a lot, especially where young adults are concerned.

After all, many of us are trying to scrape by with what we have. We might not necessarily be looking to make a major purchase that would require excellent credit.

Unfortunately, that line of thinking isn’t going to help you in the future. While you may not need amazing credit now, it doesn’t hurt to begin building credit at an early age.

If you don’t think your credit score is something to be concerned about right now, read on to learn 4 reasons why your credit score is important, and find out how it can affect your financial situation.

Reason #1: A Score Looks Better Than Nothing

If you don’t build credit early on, or you don’t make use of credit at all, you could be left with a thin file.

At my old job, I used to run credit checks on applicants for business loans, and I was shocked at the number of times “limited or no credit history” came up.

That’s not really attractive to lenders. They are letting you borrow a decent chunk of money. It’s reasonable to make sure you’re trustworthy and capable of paying it back. Without a credit history, you can’t exactly prove you’re responsible with money.

I saw this happen firsthand as investors came back and told us the applicant didn’t meet their minimum required score. It wasn’t fun being the bearer of bad news, and applicants were surprised to learn they had no credit.

Please, do yourself a favor – before we go on – check your score, especially if you’ve never done it before. Annualcreditreport.com gives you 3 free copies from each bureau. It doesn’t take long to fill out the form.

Reason #2: A Better Score Gives You Better Rates

Credit scores are critical components to getting better interest rates on loans. The difference between an excellent score and fair score could mean saving thousands. Don’t think so? Just take a look at this simple chart from myFICO that outlines the numbers.

While some lenders are taking other factors into consideration, such as your employment history, education, and debt-to-income ratio, others are still sticking to credit scores as one of the main deciding factors.

Now, you might not be in the market for a loan. Or maybe you own a home, have your mortgage and think you’re set. Having a good credit score never hurts.

You don’t know what could happen. If something major in your house decides to break, if you have an unexpected medical emergency that falls outside of your insurance coverage, or if your car randomly bites the dust (or gets totaled), you might find yourself needing more money than you have in your emergency fund.

Hopefully none of the above happens, but you may face a situation that requires you to turn to a lender for help. Getting a personal loan, taking out a HELOC or an equity loan on your house, or getting a car loan might be some options you’d consider. These all require credit checks.

Wouldn’t you rather have excellent credit and pay less because you’re eligible for the best interest rates?

Reason #3: You Appear More Responsible and Trustworthy

I said this at the beginning, but it bears repeating. Having a good credit score means you’re responsible and can make timely payments. Of course lenders love that! Why wouldn’t they?

While it makes getting approved for a loan and obtaining a better rate easier, it can also help you in other ways.

Companies have been performing credit checks along with background checks on candidates more and more lately, especially if you’re going to be dealing with money or sensitive information within the company. They want to make sure your financial situation is solid.

Insurance companies are also likely to check your credit score. You might be able to get better rates on premiums!

Additionally, your credit will most likely be checked when you fill out a rental application. Some private landlords do this as well (and for good reason).

Rent is a significant chunk of your income. If you can’t handle making the minimum payments on your credit card, how are you going to afford rent?

Reason #4: A Better Credit Score Means More Credit Available

Besides applying for a loan, you might be interested in applying for a credit card. (Secured credit cards are actually a decent way to build your credit, too.)

Having a better credit score means being able to apply for better cards! This is especially true when it comes to rewards cards with great signup bonuses. Since they typically require more upfront spending, creditors want to ensure you can handle (potentially) larger payments.

Additionally, once you’ve had a credit card for a while and have proven you’re capable of making timely payments, you can ask your creditor to increase your credit limit.

Don’t do this if you’ll be tempted to spend it all. We want to advocate for responsible credit card usage!

If you know how to use your card wisely, increasing your limit gives you wiggle room when it comes to your credit utilization. If you have a $300 balance on a card with a $500 limit, you only have $200 free. If you have a $2,000 limit, you have $1,700 free. That looks much better.

Be wary though – sometimes creditors will automatically increase your limit without you asking, so check beforehand.
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Overall, having a good credit score gives you more options, and options are always a good thing to have when it comes to financial matters.

If you’re looking to learn more about what affects your credit score, check out DC’s post here.

When did you start caring about your credit score? What do you wish you had known about managing your credit in your early 20s?