Why are credit scores important? Do they really matter?

Kumiko Ehrmantraut
Kumiko Ehrmantraut

Latest posts by Kumiko Ehrmantraut (see everything)

For most people, having a credit card, getting a mortgage, and managing the car payment is a normal part of life.  To do that, you need a good credit score.

There are some financial advisers who will tell you to cut your credit cards and pay everything in cash.

With this approach to finance, your credit score doesn’t matter. Why? Because you will pay for things in cash and you will not need credit of any kind.

If that works for you and your personal situation, great!

However, for most people, having a credit card, obtaining a mortgage, and managing the car payment is a normal part of life. There is nothing inherently “wrong” with credit cards or loans. It all depends on your financial discipline and money management.

Having a good credit score is important because it allows you to access favorable loans and credit. Your credit score can be the determining factor in whether or not you get a loan. If you get the loan, it will determine the interest rate you pay.

But credit scores aren’t just for loans and lines of credit.

Landlords often use credit scores to decide who they will allow to rent their apartments to. Do you want to get a new cell phone by getting a phone plan that allows you to pay for the cost of the smart device over time? Then you will also need a good credit score.

Whether you have a high credit score or a score that could improve, I have good news for you: Your credit score is not the end of your financial life.

Let’s take a closer look.

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Why your credit score is the beginning, not the end

Credit scores can be a touchy subject, especially if you are struggling financially.

The good news is that your credit score is not set in stone. It is not static.

Your credit score is always updated based on the information available to the credit reporting agencies. There will be mini-fluctuations here and there. Sometimes it can even drop or dramatically increase overnight.

All that to say: your credit score doesn’t permanently define you.

If you have a high credit score, great! Use it as motivation to continue practicing and implementing healthy financial habits. Remember that there is always room for improvement, so look for ways to strengthen your family’s finances.

Even if you have a credit score that can improve, keep in mind that this is not the end of your financial journey. The work, discipline, and commitment that you start today will produce positive results in the future.

Just like a new diet or exercise routine, results won’t happen overnight. Just as you wouldn’t expect to lose 15 pounds in one day, don’t expect your credit score to go up immediately tomorrow.

It really is a mindset change, a lifestyle change for your finances.

Think of it this way: When you’re on a new diet or exercise routine, sometimes the scale won’t move … for weeks! Why? Well, sometimes you’re adding new muscle as you lose fat, so even though you’re healthier, the scale isn’t showing it. There are other times when you can gain weight because you are suddenly exercising more than you used to. That sudden increase in water weight temporarily disguises the progress you’ve made. If you give up early, you will never see the fruits of your labor!

Similarly, improving your credit score takes time. It can seem like it’s taking forever, especially if you’re doing everything right and sticking to a stronger financial plan.

Now why am I bringing this up?

Because while your credit score is important, it doesn’t define you.

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If you’re feeling financially behind, burdened with debt, or suffocated by bills, it’s easy to feel discouraged. Trust me; I’ve been there. It may appear that you are trapped in a pit and that it is impossible to get out.

Fortunately, a simple change in mindset can make it easier to take proactive steps to improve your financial life.

If you think your credit score defines who you are financially, then it’s hard to change it. Why? Because your way of thinking says, “This is who I am. I can’t change it. ”This makes it much more difficult to truly commit to budgeting, savings, or planning for the future.

But if you say, “This credit score is just a snapshot of my financial life right now, and it can change at any time, ”then that gives you the power to take control of your finances.

These are the benefits of a good FICO credit score

While all of the above is true, I would be lying if I said that your credit score doesn’t matter.

Yes, it doesn’t define you, but there are undeniable benefits to having a good credit score.

Consider the following scenarios in which having a good credit score is advantageous:

  • Apply for mortgages and auto loans. Credit not only determines whether or not you qualify for the loan, it also determines the interest rate you will pay. The lower the interest rate, the less you will end up paying over the life of the loan. Every percentage point counts. For example, the difference between a 3.316% APR and a 3.566% APR on a $ 200,000 mortgage would be $ 48 per month. At first, the difference between 3,316% and 3,566% may not seem like much, but it is an additional $ 17,280 that you would pay over the life of the loan.
  • Job application. Some employers may request to conduct background screenings on new hires. If you are applying for a job that involves finances or confidential information, the employer will likely request a background check that includes a credit check. You can refuse, of course, but depending on the job, you might leave it completely out of the question. Jobs that can check your credit include military jobs, accountants, financial planners, prison workers, lawyers, law enforcement, border patrol, casino jobs, and government jobs.
  • Lighting and maintenance of public services. It’s easy to take water and electricity for granted. However, if you move and need to turn on your utilities, it is not uncommon for you to have to pay a large deposit if you have poor credit. Given that roughly 14% of the US population moves each year, this is something to keep in mind.
  • Getting better insurance rates. If you have a car, a house, or an apartment, you will need insurance. Unfortunately, there have been several studies showing that people with bad credit tend to file more claims. This gives insurance companies the “excuse” to charge higher rates compared to people with better credit. Keep in mind that you cannot be denied insurance due to a low credit score, but a higher score will help you qualify for lower premiums.
  • You will be able to enjoy the best benefits and rewards. Have you seen those credit cards with amazing introductory offers, like no interest for a year? Have you seen those cell phone plans that provide free access to online streaming services? All credit card companies have their own unique rewards, but they are generally tiered. People with higher credit scores get access to the best benefits and rewards, while people with lower scores don’t get the same benefits. Cash back, free offers, and favorable payment terms can make a big difference if you manage those benefits wisely.

The bottom line is that almost every aspect of your financial life is affected in one way or another by your credit score.

Again, your credit score does not define who you are. It is simply a snapshot of your financial health at this time.

But the reality is that true financial health and a good credit score often go hand in hand.

How can I improve my credit score?

Just a few years ago, it was on my head. I was suffocating under the weight of a debt of $ 80,000. It goes without saying that my credit score back then is not what it is today.

Over the course of 8 months, I was able to develop a strategy to successfully pay off all my debts and begin to build a future that my family and I can be proud of.

If you are in debt and struggling with your credit score, I want to share with you the exact steps I took to regain control of my financial life … and my credit score!

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Do you have any tips to improve your credit score?

Leave your comments and personal experience in the comment section below! Here at TBM, we are building a community of like-minded individuals who want to help improve their financial lives and the lives of those around them. We’d love to hear from you!

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