Many of you have probably heard financial professionals out there, like Dave Ramsey, talk about why credit cards and credit scores are one of the worst things invented for humanity. They tell you that you should just stay away from them because you don’t need them. But people like him never take a moment to explain, what can you do with a good credit score?
They’ll tell you that financial success does not require you to worry about credit or a credit score. While this may be true, let’s take a moment to also consider this: will it hurt those who know how to manage it correctly?
The answer is a resounding NO.
In fact, knowing how to manage your credit correctly and having a good credit score can actually speed up your journey to financial freedom.
You might be asking, “but how can having debt (credit is debt) help me achieve financial success? Wouldn’t financial success be classified as being completely debt-free?”
The answer to the second question is yes. However, in regards to the first question, knowing how to use credit (debt) to your advantage can be one of the most useful tools for your financial success… IF you use it correctly.
In this article, we’ll be going over 6 perks of having a good credit score. These perks are helpful for those who can manage their money responsibly. They will also help them reach financial success sooner than if they didn’t use credit at all.
Get a Lower Insurance Rate
Many insurance companies can, and often do, consider your credit history or use a credit-based insurance score to determine whom to offer insurance to and how much to charge.
While this isn’t the only determining factor for evaluations, it is one important piece of the puzzle.
Credit scores are generally evaluated to help insurance companies understand the likelihood of someone filing insurance claims that cost the company more than it collects in premiums.
If your credit score is low, you may find it more difficult to get approved for an auto insurance policy. You may also have to pay more in premiums.
For this point, however, keep in mind that a credit-based insurance score will never be the sole decision-maker of insurance approval or denial. It does not apply to all states in the US. Also, certain insurance providers (i.e., home insurance vs car insurance) have different rules and regulations to follow in terms of credit.
Stop Paying High Security Deposits
If you aren’t familiar with a security deposit, it is a sum of money given to a landlord, lender, or seller of a home or apartment as a measure of security in case of default or damage. It can be refundable or non-refundable, and can also be used to pay for damages or lost property.
For this point, keep in mind that your credit score shows how responsible you’ve been with your finances.
Your credit score is important when renting or buying because it shows the recipient of your security deposit how risky of a buy/renter you are. A good credit score shows that you’ve made consistent on-time payments on loans and credit cards and none of your financial accounts have defaulted (gone to collections).
A person with a low credit score or no credit score has little to no evidence of being a risk-free buyer/renter.
While a person with a good credit score is seen as less risky than someone with a low credit score.
A security deposit is based on how much risk the recipient is taking on when renting or selling their property. Therefore, if you have a high credit score, they may ask for a smaller security deposit. If you have a low score, they may ask for more.
In the case of renting alone, some landlords and property management companies have minimum credit score requirements that must be met in order to be able to apply for a unit at all.
Having a low credit score or none at all will not only require a higher security deposit, but it will also minimize your chances of approval to rent or buy and reduce your options of where you can live.
Get a Higher Credit Limit
For those who are unfamiliar with a credit limit, it is simply the maximum amount of credit that a financial institution or other lender will give to a credit user. For example, if my credit limit on one of my credit cards is $2,000, then that is the maximum amount that I am able to use.
As mentioned before, a high credit score indicates that you are responsible with your finances. Thus, to a financial institution or lender, when you have a high credit score, you are seen as a responsible credit user who pays back everything on time and consistently.
For that reason, they will trust you more and can extend a higher credit limit to you.
But don’t let a higher credit limit cloud your thoughts. Having a higher credit limit does not mean that you should go out and spend it to the max month after month. You should remain fiscally responsible and only spend what you can afford.
A general rule of thumb when using credit is to aim for a credit utilization ratio of 30% max. This means that if you have a $2,000 credit limit, you should be aiming to use a max of $600 per month to keep your credit utilization low.
The higher your credit utilization, the harder it hits your credit score.
Help You Get a Job
Believe it or not, some employers run credit checks as a part of their background check process. They conduct these credit checks for security purposes to get a quick snapshot of your previous history and how you handle responsibilities.
According to financial expert John Ulzheimer, formerly from FICO and Equifax, “Credit reports indicate whether or not you’re responsible. […] They also indicate if you’re in financial distress. These are attributes that are important to employers. For example, would you want to hire someone in your accounting department who can’t manage their own obligations?”
A credit check in a potential position is usually one of the last steps in the hiring process, nonetheless, it contributes as a factor.
Help Your Childen’s Credit Score
When you have a high credit score, it is likely that your children’s score will be high as well. This is not only because you’re setting an example as a responsible credit user, but because you have a number of ways to help them build theirs.
One of the most efficient ways to do this though is to add your child as an authorized. An authorized user is a person who has permission to use another person’s credit card but isn’t legally responsible for paying the bill.
Before adding your child as an authorized user, make sure to call your card issuer to confirm that their activity will be reported to the credit bureaus.
Typically, there are minimum age requirements for your child to meet in order to be added as an authorized user on your account. Make sure to keep those in mind. Also, teach your child about responsible credit usage before adding them to your account.
Increase Your Chances to Get Approved for a House
Most people understand that a good credit score improves your chances of qualifying for a mortgage. This is because it proves to the lender that your chances to default on your loan are low, therefore, you’re less risky.
And although there are options out there to apply for a mortgage without a credit score (via a longer process called manual underwriting), across the board, you’re chances to get approved for a mortgage are higher when you have a high credit score.
Manual underwriting is a time-taking process that will require a lot more information from you than if the lender simply looks at your credit score.
On top of that, you will be approved with an above-average mortgage rate that people with lower credit scores cannot attain.
Save Money On Interest
This point ties strongly with the last one regarding mortgages.
Whenever you borrow money, there will always be a price for it. Now, in the case of credit cards, you don’t necessarily have to pay that if you’re responsible with your credit. But in the case of bigger loans, like a mortgage, you’re going to have to pay some interest for borrowing that money.
The amount of interest you’re charged for borrowing money depends strongly on your credit score. A good credit score will result in lower interest rates, while a bad score will result in higher interest rates.
Remember, compound interest can work with you as well as it can work against you, so minimizing your interest rates will actually save you THOUSANDS if not MILLIONS of dollars in the long run.
How do you minimize this interest? Get that credit score up!
I’m personally a fan of credit and I believe it is a great tool to help people build wealth. However, although it is a slower process, building wealth without a credit score is also possible.
I will never say that everyone should either stay away from credit or use credit because the thing about personal finance is that it should be what its name implies: PERSONAL.
Therefore, if you’re someone currently struggling to stop living beyond your means, credit cards and loans are probably not your best option, at least not right now.
It would be better to focus on your spending behavior and learning how to live below your means before you continue or start utilizing credit. Otherwise, it will cause nothing more than another financial hole in your life.
For those of you who are responsible with money, credit is a great option to speed up your wealth-building journey!
Situations are unique and there will never be a one-size-fits-all in personal finance.
If you have any questions or comments, please leave them down below in the comment section. I will be more than happy to read and respond to each of them!