Importance of good credit: Seventh in a series of financial tools to master
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| Good credit equals financial security! |
Welcome back! My name is Jake and I’ve been retired since August 2020 at the age of 48, thanks to the FIRE (financial independence retire early) movement.
This series ‘financial tools to master’ was created for the benefit of anyone who’s never gotten any finance education in school or from parents (like me). I also created these posts to help my nieces and nephews in their quest to become financially knowledgeable and eventually to become financially independent.
In this continuing series, I’d like to go over the importance of having good credit. If you missed any of the previous series, please see the links at the bottom of this post.
What is credit?
Credit is the trust which allows one party (the lender) to lend money or resources to another party (the borrower) where the borrowing party does not need to reimburse the lender immediately. The borrower is obligated to pay back the money or resources at an agreed upon time set by both lender and borrower.
This agreement usually results in paying interest on the borrowed money or resources.
Why do I need good credit?
Good credit is an absolute requirement as grown ups. It allows everything from renting an apartment, buying a financed/leased vehicle, getting a mortgage, to getting credit cards to happen.
Without good credit, the interest rate you’ll pay will be higher than someone with good credit, resulting in thousands or tens of thousands of dollars in additional interest.
What is a credit score?
Credit score is a number usually ranging from 300-850 that is assigned to an individual to establish creditworthiness of that individual. The higher the number, the better your credit history. A number above 800 is considered excellent, 740-799 is very good, and so on.
To determine a credit score, factors that are important are as follows:
Credit history, on time payments, how much debt you have, number of open accounts, and others.
Tip: If you already have a credit card opened under your name, you can usually get a free credit score from the credit card company website. Login, then click where it says ‘see your credit score’, or something similar. *If you don’t see that, check with your credit card company for more info.
How do I get good credit?
No one is born with good credit history, unless your parents added your name to their credit cards when you were young, and therefore you automatically got good credit history. (They made sure they paid on time for this to happen of course!)
For the rest of us, we have to build our own credit history. I didn’t have any credit history and therefore I was someone whom the credit industry calls ‘no credit’ history. I didn’t have bad credit, because I simply did not borrow anything then paid back, to show a history of credit.
Since I didn’t have any credit history, I piggybacked off of my wife’s credit card for about a year, and I made sure the payments were made on time. After about a year, I opened my own credit card in my name! It was a good feeling to be able to accomplish a good credit history!
You can do the same if you do not have any credit history. Add your name to your significant other’s credit card or your parents, then be sure you pay on time for few months.
The more years you build a good history of borrowing money then paying off on time, will result in a better credit score.
How does good credit impact my bottom line?
As mentioned above, having good credit history equals less interest on money you borrow. See below for examples of how good credit impacts your bottom line.
- When renting your own apartment, you’ll need to have good credit history as a starting point. Others, like current employer and paystubs are important after showing you have good credit history. If you don’t have good credit, you’ll most likely will need to find someone (significant other or parents) to co-sign the rental agreement with you. It may also require you to put down more money for deposit if you don’t have good credit history!
- When buying a car you’re financing or leasing, a good credit history will guarantee a low interest rate. When you see ads on TV or media for 0.9% interest rate for 48 months, this rate is usually only available for individuals with excellent credit history. If you don’t have excellent credit history, then your interest rate will be higher than the advertised rate, costing you hundreds more in interest over the life of the loan.
- When getting a home mortgage, a good credit history will be even more important due to the amount of money you’re borrowing from the mortgage lender. If you have excellent credit history, then your rate will be guaranteed to be lowest available (at this writing around 2.7% on a 30 year mortgage). If not, you’ll most likely get a higher rate resulting in more money paid on interest. On a mortgage, this additional interest difference will be thousands or tens of thousands of dollars!
- When getting a job, a good credit history will also come in play. I know it did when I got jobs in the past. When you have good credit history, it shows you’re trustworthy. You can be trusted to borrow money, then pay back on time, therefore to a potential employer, you can be trusted with the work!
- When getting a car insurance, having good credit history will mean getting lower rates on car insurance. I know when I had Geico insurance, they consider good credit history as one of the determining factors when giving out quotes. Insurance companies consider someone with good credit to be safer drivers.
If you missed the post ‘Importance of a checking account...’, please click here.
If you missed the post ‘Importance of a savings account...’, please click here.
If you missed the post ‘Importance of a budget...’, please click here.
If you missed the post ‘Importance of a retirement account...’, please click here.
If you missed the post ‘Importance of a brokerage account...’, please click here.
If you missed the post ‘Importance of insurance...’, please click here.
Please check out our YouTube channel ‘Wandering Money Pig’ showcasing our travels and our Pomeranian dog! https://www.youtube.com/channel/UC3kl9f4W9sfNG5h1l-x6nHw
