Why is credit important?

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 and employers. 

Generally speaking, the higher your credit scores, the better. And that could help you achieve your life goals, like buying a home.

What you’ll learn:

• Your credit is important because it can demonstrate to lenders that you practice good financial habits.

• Having good credit can increase your chances of qualifying for credit cards, mortgages and auto loans.

• Good credit can also help you qualify for more favorable loan terms and interest rates.

• Credit reviews could also play a role in applications for housing, jobs, insurance and utilities.

Your credit profile can help demonstrate your track record of financial responsibility. For that reason, it can help you qualify for everything from a credit card to a student loan to a mortgage and even a job.

Good credit scores are important because they demonstrate that you practice good financial habits, such as paying bills on time. But keep in mind that low credit scores can give the opposite impression. 

The truth is, there’s really no one-size-fits-all way to know how credit is evaluated by lenders. But it’s a good idea to keep your credit in good shape. Capital One has tips for using credit cards responsibly that could help.

One way to appreciate the importance of a healthy credit profile is to know when lenders might check a person’s credit:

When you apply for a credit card, the card issuer may check your credit. 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 for 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 depending on credit score:*

• A person with a 650 credit score, which FICO classifies as fair, would have a 7.297% APR and a $1,371 monthly payment.

• A person with a 670 credit score, which FICO classifies as good, would have a 6.867% APR and an $1,313 monthly payment.

That $58 difference might not seem like much. But over the course of the loan, it could add up to more than $20,000. And that’s starting from a 20-point difference in credit scores. With an even higher credit score, a borrower’s monthly payment could go down even more.

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

Cellphone providers and utility companies may also consider your credit when you set up accounts. With good credit, you may be able to avoid paying deposits and receive 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. It can help to read the rental application fine print to see if it requires such requests.

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 applicant with better credit. Or they may ask you to pay a larger security deposit or pay a few months’ rent up front.

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 companies may use information from background screenings. And companies must get your written permission to run a check. But if you decline, they may not consider you for the job at all.

Keep in mind that you can still get a job with a low credit score. In the meantime, you could work toward improving your credit.

Monitoring your credit can give you a sense of where you stand. It can also help you track your progress as you build credit with responsible use.

CreditWise from Capital One can help with all of that. With CreditWise, you can access your TransUnion® VantageScore® 3.0 credit score and TransUnion report anytime. CreditWise is free for everyone, whether you’re a Capital One customer or not. And using CreditWise won’t hurt your score. 

You can also keep an eye on your credit by getting free copies of your TransUnion, Experian® and Equifax® credit reports at AnnualCreditReport.com.

Having good credit is so important because it can help you qualify for credit cards, loans and other financial products. And that could help you achieve big goals like owning a home. 

Developing good credit habits is one way to improve your credit. CreditWise can help, too. With CreditWise, you can monitor your credit health for free—even if you’re not a Capital One customer. Plus, it won’t hurt your credit scores.