The importance of credit

Your credit profile can influence your chances of qualifying for loans and credit cards. Most people know that. But it can also play a role in decisions made by insurance companies, landlords, utilities and employers, too. 

Read on to take a closer look at why credit is important—and why having good credit can be so helpful.
 

Your credit history is an indication of how you’ve managed debt in the past, and many companies use it to predict your future financial behaviors. So when you apply to do things like borrow money, get a credit card or rent an apartment, your credit history may be looked at.

Good credit scores may suggest you’re responsible and practice good financial habits, like paying your bills on time. But low credit scores may give the opposite impression. 

There’s no one-size-fits-all way to know how credit is judged. But the Consumer Financial Protection Bureau offers some ways you can build good credit. And Capital One has six tips about using credit cards responsibly that may be helpful, too.

Knowing when your credit will be evaluated can give you a glimpse into how important it can be. Here are five areas where your credit might come into play: 

When you apply for a credit card, the card issuer may check your credit. Every company has its own credit policies. But good credit may give you more options. And if you’re approved, good credit may also make you eligible for things like a higher credit limit and a lower annual percentage rate (APR).

Your credit may also play a role if you’re trying to upgrade to a new card or requesting a higher credit limit on an existing card. 

Credit also plays a role when you’re trying to do things like buy a home or finance a car. Having good credit may help you qualify to borrow—and borrow at lower interest rates. And interest rates are important, because the higher your rate, the more you could end up paying over the life of the loan.

Consider recent averages for a 30-year, $200,000, fixed-rate mortgage. According to figures from FICO®, a commonly used credit scoring company, payments can vary widely. For example, FICO offers these two estimates:

• A person with a 650 credit score, which FICO classifies as fair, would have a 3.566% APR and a $908 monthly payment.
• A person with a 670 credit score, which FICO classifies as good, would have a 3.136% APR and an $860 monthly payment.

That $48 difference might not seem like much. But over the course of the loan, it could add up to more than $17,000. And that’s starting from a 20-point difference in credit scores. As credit scores continue getting higher, the monthly payments could go down even more—making the difference in total payments go up.*

Keep in mind that in addition to mortgages and auto loans, it may also be more difficult to lease a car if you have bad credit.

Your credit history may even influence how much you pay for an insurance policy. But instead of using a traditional credit score, insurers may use credit-based insurance scores—along with other factors. Auto insurers, for example, may also consider things like your age and the car you drive. 

Credit may also be considered when you set up accounts with utilities and cellphone providers. With good credit, you may be able to avoid paying deposits or be offered more favorable contract terms.

When you apply for a lease to rent an apartment or a house, the landlord may check your credit history—in addition to your criminal and rental histories. Landlords often request permission to run screenings, but they’re not always required to do so. Sometimes requests are included in rental applications. So it can help to read the fine print.

Landlords might run these screenings to predict what kind of tenant you’ll be. Even if you don’t have perfect credit, you may still qualify to rent. But if a landlord has received multiple applications, they could decide to rent to another person instead. Or you may be asked to pay a larger security deposit or pay a few months’ rent upfront.

If you apply for a job, some employers may ask to run a background screening, which can include a credit check. It’s especially typical for jobs that involve finances or sensitive information. 

Rules vary about how information from background screenings can be used. And companies are required to get your written permission to run a check. But if you decline, you might not be considered for the job at all.

Keep in mind that you can still get a job with less-than-perfect credit.

There are no quick fixes to improve credit. But keeping tabs on your credit reports is one way to ensure potential employers are at least judging the correct information.

Now that you’ve seen why credit is so important, you may wonder how you can track it. Aside from knowing where you stand, monitoring your credit can also help you spot reporting errors and potential fraud attempts. 

CreditWise from Capital One can help with all of that. You can access your TransUnion® VantageScore® 3.0 credit score—another popular scoring model—every week and monitor your credit with CreditWise. It’s free for everyone—Capital One customer or not. And using it won’t hurt your score. 

You can also get free copies of your TransUnion, Experian® and Equifax® credit reports at AnnualCreditReport.com.

No matter how you monitor your credit, just know you’re taking an important step to develop good credit habits.