9 min. read

Bad credit can affect many areas of your life, but one of the most critical is how much more you’ll have to spend to borrow money. A typical car loan, for example, could cost as much as $5,000 more in interest and carrying charges.

Taking out an auto loan is one of many costs that will increase when you have a low credit score. We’ll dive into what a good credit score is and why you should strive to improve your credit score. These 8 benefits of a good credit score can greatly impact your financial future.

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What Does "Good Credit" Mean?

When you apply for a loan, a mortgage, a credit card, or any other type of credit, the lender will check your credit score. Many lenders will use the words credit score and FICO score interchangeably. Don’t be confused by different words, they both point the lender to the same conclusion about your credit.

Your credit score is based on your credit history which includes your payment history, defaulted loans, your credit limits, your credit utilization, and a few other factors. Overall, the score is an indication of your creditworthiness. So, if you have a history of responsible credit usage, that will be reflected in a high credit score.

Lenders typically decide whether to lend you money and if so, how much interest to charge, based on your credit score. The higher your score, the better the terms.

If your score is under a certain threshold, you won’t qualify for credit at all. That can be a serious blow to your plans if you intend to buy a home or a new car in the near future.

8 Benefits of Having Good Credit

Being able to qualify for a loan or other type of credit is the most fundamental benefit of having good credit — but there are plenty of other advantages that may not be as obvious. Let’s dive into the other benefits of a good credit score below.

1. Lower Interest Rates

If you have a good credit score, you’ll be able to borrow money at lower interest rates. Whether it’s a bank loan or a credit card, a good credit history tells the lender that you’re not a risky investment.

When a lender extends credit, there’s a certain amount of risk involved. Some types of credit, such as mortgages and car loans, use the purchased item as collateral for the loan — but there are still a lot of extra costs involved if the lender has to foreclose or repossess.

If you have less-than-stellar credit, they charge higher interest rates as insurance against having to take those actions. If you have a good credit history, there’s less chance of that being necessary.

2. It's Easier to Get Credit

The better your credit history, the easier it will be to get credit. If your credit score is under a certain point, lenders won’t even consider extending credit. Or if they do, the terms are often tilted so far in their favor that it’s hardly worth considering.

This benefit also means you’ll be able to qualify for more credit cards, including rewards cards. Whether you want to save money when traveling, collect points towards products and services for your home, or get a percentage of everything you spend credited back to you, you’ll be able to pick and choose from the best rewards cards.

On the flip side, a bad credit score can preclude you from scoring the most lucrative credit card sign up bonuses. Travel hacking becomes much easier once you’re reaping the benefits of having a good credit score.

3. Greater Borrowing Power

When you have a good credit score, you have a greater ability to borrow funds. For example, you could open a line of credit to fund your growing business. Or unlock a higher credit limit in order to lower your overall credit utilization rate which could increase your credit score.

If you have a bad credit score, this might be out of the question.

4. You'll Have More Negotiating Power

When credit is easier to get, it means you have more negotiating power. For example, if you’re applying for a mortgage or car loan, you can shop around for the best interest rate and other terms. If you don’t like what one lender is offering, you can move on to the next.

Lenders recognize this as well. If they see that you have a good credit score, they’re going to do everything they can to keep your business. If your credit score is high enough to qualify for credit but not great, they know that you won’t have as many alternatives. With that, their offer will likely be less than stellar if you have a fair credit score.

Predatory lenders might even take advantage of the situation, knowing that few, if any, other lenders would approve you.

Benefits of Good Credit

5. It's Easier to Rent a Home

Most apartments and other rental housing will do a credit check when you apply for a rental unit. They want to be sure they can count on you paying your rent on time every month — or even that you’re likely to pay it at all.

It’s much more work to evict someone who isn’t paying their rent than it is to avoid renting to that person in the first place. With good credit, you’ll be able to qualify for virtually any rental you wish and you may even be able to negotiate a better price in some markets.

In some cases, the owners will still rent to someone with a lower credit score but a larger deposit may be required up-front. With good credit, you’ll be able to keep more of your money in your pocket. You can see how important that is by running some numbers through one of our financial calculators. Putting that extra money to work for you now can completely change your retirement outlook.

6. Lower Car Insurance Rates

Buying car insurance is another situation that often requires a credit check. The insurance companies want to be sure they’re going to get paid — but on top of that, they want to ensure that you’re not going to try to scam them with a fake claim.

Insurance companies believe that someone with bad credit might be more likely to make a false claim. After all, bad credit can indicate a host of hidden financial problems. When someone is backed into a financial corner, you never know what someone might feel forced to do. Whether that’s true or not is irrelevant. It just comes down to what the insurance company believes.

With a higher credit score, you might see lower insurance premiums based on lower perceived risk.

7. Lower or No Deposits Required

If your credit is not as good as it could be, renting isn’t the only situation that could need a deposit upfront. Many cell phone plans and utility services often require deposits as well.

Many cell phone plans include a “free” phone when you sign a contract for a year or two. The phone isn’t really free — it’s simply financed over the term of the contract. Part of the cost of your monthly bill is paying down the cost of your phone.

The catch is, you have to qualify for these plans because the cell company is “lending” you the money for the phone upfront. If your credit isn’t very good, you may not qualify for the subsidized plan and would have to pay a deposit upfront instead to cover part or all the cost of the phone.

Utility companies also often want a deposit if your credit score isn’t great. Utility companies are “lending” you the product as well, whether it’s electricity, cable, telephone, or some other utility. You use the service for a month and then pay. If they have any doubts about your ability to pay, you’ll have to give them a deposit to cover the cost of the service you haven’t used yet.

Avoiding these deposits keeps the money under your control as long as possible. You can put it in savings, invest in your retirement accounts, use it as an emergency fund, or invest in yourself.

8. More Job Opportunities

Perhaps the most unexpected credit check comes from potential employers. That’s right. Many employers do credit checks on potential employees. Although they have to get your permission to do so, it may be a condition of being made an offer.

They want to be sure you’re a trustworthy person and a spotty credit history may indicate that’s not the case. This can be particularly important if the job deals with money in any way. Much like insurance companies, employers want to feel safe from a new employee stealing money to pay off debts.

Some jobs may also have higher levels of security or information clearance involved. A credit check is usually one of the first steps in that process and bad credit will usually disqualify you immediately.

How Do You Get Good Credit?

If your credit isn’t as good as you’d like or if you’re just getting started on building a credit history, there are a few steps you should take to get started on the right path:

  • Pay your bills on time
  • Pay off your credit cards every month, but keep them open so the good payment history will show up on your report
  • Don’t apply for credit you don’t need
  • Check your credit report annually and dispute any errors
  • Call your credit card company and ask for a credit limit increase (bonus points if they do a soft pull rather than a hard pull)

Although it won’t happen overnight, small steps can help you to improve your credit score within a few months. Don’t wait to start building your credit score, start today!

>> If you’re struggling to get your finances in order, creating a budget is the best place to start. Check out our budgeting tools review to automate the process.

Good Credit is a Stepping Stone

Yes, a good credit score can be a useful financial tool. However, a high credit score is not your end goal but financial independence is. If you are seeking financial independence, then a good credit score can help you reach that goal faster.

While enjoying all the benefits of a good credit score, you can secure solid savings across multiple areas of your life. This could easily lead to a few hundred or even over a thousand dollars per year. Whether you avoid a utility company deposit or secure a lower interest rate on your mortgage, each helps keep money in your pocket. You might be surprised at how quickly those savings can add up.

As you build your savings, you’ll want to optimize your FIRE strategy to invest those savings for long-term growth. Check out our FIRE Guide for tips on how to make the most out of your savings!

What benefits have you experienced as a result of having a good credit? Are you building your credit? Let us know in the comments!