Good vs. Bad Credit: Why Is This Important?

/ BY / Credit Score

If you're like most people, you probably already know that your credit score is an important tool in determining your financial stability. As a general rule, the better your credit, the more likely lenders will be to lend you money because of a proven track record of paying it back on time.

When credit is bad, however, you may find that you're limited not only financially, but in other areas as well.

How Credit Is Calculated

Your credit score is a number calculated by a number of factors that predict your risk factor in repaying your loans and bills on time. The most commonly-used credit score is the FICO score, a number between 300 and 850. Each person has three scores—one from each of the major credit reporting bureaus, Experian, Equifax, and TransUnion.

Your credit score is determined by the following factors:

  • Payment history - 35%. The largest portion of your credit score is determined by your payment history. If you are more than 30 days past due on an account, you will most likely have a negative report on your score.
  • Available credit - 30%. The second biggest factor in your credit score is the amount of available credit on your accounts. If you are maxed out on all your accounts, your score will be lower.
  • Length of credit history - 15%. How long you have maintained a credit history is also important.
  • Types of credit - 10%. A small percentage of your credit score comes from the assortment of accounts you have; for example, credit cards, mortgage, or car loan.
  • Credit inquiries - 10%. Credit inquiries and recently opened accounts are also taken into account.

You can learn more about your credit score and the determining factors here.

Good vs. Bad Credit

Generally, "good" credit scores are scores of 700 and above, "average" credit includes scores of 650 to 700, and anything lower than 550 is considered poor. In order to get the best interest rates for loans and credit cards, the higher the score, the better. People who have poor credit scores might be denied a loan altogether, or may have to pay exorbitantly high interest rates.

Many people think good credit is only important if you're applying for a loan. However, good credit is a determining factor in a number of situations, some of which you might not expect. Here are a few of the things a good credit score can help you with:

  • Housing. If you plan on renting an apartment or house, virtually all property managers and landlords will run a credit check. A good score can mean the difference between easily finding housing and having application and deposits waived and being denied altogether.
  • Insurance. Most car insurance providers run your credit history as well. If you have a stable, good credit history, they view you as responsible and assume your responsibility will carry over into driving as well, making you a lower risk.
  • Employment. Some employers will check credit before offering you a job. As with insurance, they may view your credit score as an indication of your overall level of responsibility.
  • Utilities. A poor credit score can also affect your ability to have basic utilities turned on in your home. Poor credit may require a costly deposit.

Good credit is important not only for being able to purchase a home and vehicle, but it can also affect your ability to rent a home, find good rates on insurance, and even get a job. If your credit is less than stellar, start today to raise your score to help you overcome the obstacles of bad credit.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.