Benefits To Having Good Credit

On the path to financial freedom, the vast majority of us are going to keep an eye on our credit score along the way. This score can change pretty quickly and drastically at times and might feel like it’s made up (it’s not 🤪). Depending on your goals, and current situation, it might be in your best interest to put some level of effort into improving your credit score.

There are a few strategies when it comes to best practices, but first it’s important to know how this score is calculated. When you make a money move, like open a checking account or a new line of credit, this information is sent to the credit bureaus. The 3 main credit bureaus in the US are Experian, Equifax, and TransUnion. These credit bureaus create a credit report based off your credit history, payment history, etc. Your credit score is then created from these reports and shared with future lenders when applying for credit and loans. FICO is the most widely used by lenders to attain your credit score, but there are others out there.

Check out this post on how credit scores are calculated to see how heavily different credit events could impact your score. Some of us Savvy Solos have an extreme aversion to debt, and the idea of taking out loans in the future is daunting. For the most part, I’m with ya. Still, there are plenty of reasons we shouldn’t be ignorant of what our credit looks like.

There is a certain pundit in the personal finance space that refers to your credit score as your “debt score.” In a certain way, they aren’t wrong… The score is generally based off your history with managing credit and debt. Insinuating that this score is only used on future loans, however, is objectively wrong.

What kills me about this particular pundit is that they almost always recommend people to become homeowners. Yes, it is possible to attain a mortgage without a credit score, but it’s very unlikely you are getting the best possible rate. The lender, in the case of no credit score, is subject to put in extra work and they aren’t going to do it for free. Many lenders out there don’t even offer mortgages to those without credit scores/reports for this very reason.

Obviously, having a strong credit score will lead to better rates on loans (mortgages, personal loans, business loans, etc), this goes without being said. Let’s just say you are on the “no debt forever” train. There are still plenty of other benefits to having a good credit score.

Believe it or not, your credit history might have an impact on your home and car insurance. While your actual credit score can’t directly be used to determine your rates, most insurance companies consider a credit-based insurance score and credit history to calculate premiums. According to Natalie Todoroff on bankrate.com, “Homeowners with poor credit pay an average of 93 percent more for home insurance than homeowners with excellent credit.”

Car insurance appears to be on the rise everywhere, apparently poor credit could lead to a higher expense here as well. According to this article, by Louis DeNicola on the Experian website, “Auto insurance companies can, and often do, consider your credit history or use a credit-based insurance score before offering you coverage.” Obviously, it’s not the only thing they are looking at, but I found it quite surprising that this was a factor at all. Some states will strictly limit insurance companies from doing this, but depending on where you live, you might be applicable for certain discounts on premiums.

According to John Egan on experian.com, a landlord likely wouldn’t “zero in” on the person’s credit score, but they do have the option of running a credit check on any potential renter. A history of late/missed payments could result in a landlord moving to the next candidate, or they might ask for additional assurances to offer the place to you.

In my personal experience, I once paid a landlord double security deposit for the opportunity to rent a place. Of course, this is back when my personal finance situation was a nightmare, and this particular place was all I could afford. At the time, I had no idea my credit history would play a role. Since then, I’ve also had multiple friends who were denied from renting due to their own credit problems; generally, this might happen with the larger property rental outfits.

While employers are not legally allowed to access your credit score, they might (with your permission) be able to access your credit report. According to Yoni Blumberg of CNBC, a study found that “72 percent of employers conduct background checks on all the employees they hire and, of those cases, 29 percent check credit reports.”

In general, it’s highly unlikely that your credit report is going to make or break your chance at a particular position. The above referenced article goes on to explain that there has never been a verified example of using credit history to make an employment decision. That said, patterns of mismanaging money on a credit report could show signs of irresponsibility and may be a factor depending on the position.

If you were an employer, and you had an option of two essentially equal candidates; are you going with the one with a flawless credit report or the one with a number of missed payments and multiple collection accounts? I thought so. Like I said, it likely wouldn’t factor in too much in general, but it might move the needle in a tight race.

According to the FTC (Federal Trade Commission), your credit history might factor in when looking to set up gas, water and electric at your new home. In many cases, one with poor credit history might need to pay a deposit or obtain a letter of guarantee. In some rare cases, someone might get denied services all together! 😬

The above referenced article goes on to explain that applying for utilities is the same as applying for credit. Also, consistently paying bills on time (or failing to) can directly impact your credit history. Failing to make payments can lead to collections and can lead to cut off services. Its uncommon for someone to be denied service altogether, but the added expense of a deposit for necessary utilities after a move can be pretty detrimental in some cases.

Obviously, if you are completely against credit cards altogether, this one isn’t for you. For the rest of us mere mortals, reward credit cards have tremendous benefits! I’ve known several people who have gone on entire vacations using only credit card miles/points acquired from playing the game.

Those with poor/no credit will still have access to getting a credit card, but unfortunately usually not one with big rewards or exclusive perks. Still, depending on your current situation, it might be worth getting a standard credit card for now to help build that good credit for future use.

Quick note, if you haven’t read my post on best practices for credit card use, it might be worth a look. Missing/late payments can defeat the purpose of rewards completely, be sure to use these cards responsibly.

Savvy Solos in general are all going to have different wants/needs, which means we usually have different paths to best reach our goals. One of the things that will benefit all of us, in one shape or another, is to have good standing credit.

Attaining a good credit score, along with a strong credit report, is going to be a longer journey for some of us. Keep your nose to the grindstone, and make decisions that will better your credit history for the long term. Yoda once said “Do or do not, there is no try.” BMAD says, “Screw Yoda, keep trying! I know you can get there!”

Stay classy Solos! ✌️