What’s the Importance of Maintaining a Healthy Credit Score?

Did you know that the average FICO Score in the US has risen by 21 points from 2010 to 2020? As a result, the average FICO credit score now sits at 710. Moreover, all states and generations saw an improvement in their average scores.

As a result of those positive changes, more US consumers reached a healthy credit score level. This, in turn, led to fewer folks having subprime or low credit scores.

As a consumer yourself, you definitely want to belong to the “healthy” score group. After all, your credit score influences so many aspects of your life, and not just your ability to take out a loan.

To that end, we created this guide on the top reasons you should aim for an optimal credit score. Read on to discover how it can affect your life and the benefits it can bring to the table.

Better Chances of Securing New Credit

About one in five US consumers who applied for a financial product in 2020 got denied. The most common rejection was for credit cards, but many others got denied a new auto loan or mortgage.

Either way, according to those who got a no from lenders, the reason for the denial was a too-low credit score.

Do note that there are more than 1,000 types of credit scores, and they have different high and low ranges. However, FICO Scores are the most common, as they’re the basis for at least 90% of lending decisions.

A FICO score of 670 is the least you can have to stay within the good credit range. Bring it up to at least 740, and you’ll be part of the “very good credit” score group. A score of at least 800 will land you in the “excellent” score category.

A FICO score of 580 to 669 only ranks as “fair,” and anything below that already classifies as poor. However, some lenders may regard a fair score the same way they do a poor score. For that reason, a score that falls below 670 may already make you unqualified for new credit.

In any case, lenders don’t like those low scores, as they associate these with a high risk of non-payment. What lenders prefer are consumers with good, very good, and excellent scores. So, the higher your credit score, the more chances you have of getting approved for new credit. If your credit score is to low you might question, do 500 credit score credit cards exist?

Qualify for Lower Loan Rates 

The higher your credit score is, the more likely you will receive credit with better rates and terms. For example, a credit score of at least 720 can qualify you for a personal loan with an annual percentage rate (APR) of 12.5%. By contrast, borrowers with a score of 690 to 719 are more likely to get a rate of 15.5%, which is 3% higher.

That 3% difference may not seem a lot, but if you apply it to a long-term, high-principal loan.

Save Thousands of Dollars on Big-Ticket Loans

The bigger a loan is, the more expensive it can get since the interest rate gets applied to a larger amount of money. Mortgages are perfect examples of such massive loans with high costs. Their rate may look smaller, but that gets applied to hundreds of thousands of dollars.

Since a high credit score can snag you a lower mortgage rate, you can save thousands over the life of your home loan.  

Stronger Negotiating Power

The higher your credit score is, the more leverage you can use to negotiate lower interest rates. For instance, you can use this as a tool to get a better auto loan term from a car dealership. You can also take advantage of your high credit score to secure a low-interest credit card.

More Favorable Insurance Rates

Industry studies found a connection between financial management and insurance claim risks. They discovered that folks who better managed their money tend to make fewer claims.

Now, keep in mind that having a good credit score is an indicator of good financial management. After all, such scores go hand in hand with on-time loan repayments. They also indicate lower credit utilization and fewer negative credit information.

As such, consumers with good credit scores tend to have better insurance rates.

Keep Your Credit Report Clean

Your credit score won’t appear in your credit report, but there’s still a link between the two. For starters, hard credit checks for loan applications show up on your credit report. Inquiries, in turn, account for 10% of your credit score.

Late or missed payments and collection accounts also stay on your report for seven years. The same goes for Chapter 13 bankruptcy, but it’s a Chapter 7 one; it’ll stay on record for 10 years.

Those negative pieces of information almost always indicate poor credit scores. By contrast, folks with good credit scores often don’t have these details on their reports.

That’s why you’d want to maintain a healthy score, as it also influences your credit report. That’s why it’s important to use products like Cambio, a credit improvement app that helps keep you on top of your finances.

However, it’s vital to note that credit reporting errors do happen to about 20% of consumers in the US. Some of the most common include wrong personal information and balance errors. Fraudulent charges and even duplicate incorrect information are also typical.

If you believe you’re a victim of such mistakes, request a free copy of your credit report. If there are multiple errors there, considering speaking with a credit repair expert. They may be able to assist you in the correction and removal of those mistakes.

Avoid the Need to Rely on Loans With Exorbitant Rates

Payday loans, pawn loans, and auto title loans are some of the highest-cost loans you can ever take on. For instance, a 15-day payday loan can have an APR as high as 400%. That’s over 20 times higher than the APR of most personal loans.

Despite that, many people in the US rely on these exorbitant loans due to their poor credit scores. They tend to turn to these loans after getting denied by a traditional bank or a credit union.

In that way, having a good credit score can help you avoid relying on such financial products.

Live Comfortably With a Healthy Credit Score

As you can see, a healthy credit score affects not only your wallet but the roof above your head, too. It also lets you snag better insurance rates, giving you even more opportunities to save. All these money-saving benefits can then help you live comfortably.

All those should be good enough reasons to maintain an optimal credit score.

Ready for more smart budgeting or even healthy living tips and tricks? Then be sure to browse our other recent posts for more guides like this!