You know that taking care of your credit score is Finance 101 – pay your bills on time, borrow responsibly and keep up with your payments, and your score will increase.
Your credit score acts as “a quick and easy way for anyone to get an understanding of where a person’s creditworthiness is,” says Gary Tymoschuk, vice president of operations at the Credit Counselling Society.
You likely also know that the higher your credit score, the better your chance of getting approved for a loan or credit card.
But a good credit score can save you money, too, and improve your chances of making more money. Here’s how:
1. A good credit score can lower your bills.
Some companies believe your credit score reflects how responsible you are with your money. By extension, these companies will view a customer with a high credit rating as lower risk.
A high credit score can get you lower insurance rates, better cellphone plans, and a lower required down payment on big-ticket purchases.
Shocked to see cellphone bills on the list? Tymoschuk says signing up for a plan with a cellphone company is a form of credit.
“People don’t think of it that way, but you’re buying that phone. It’s financed over a period of time,” he says.
Robert Glen, debt relief specialist at 4 Pillars Consulting Group, says cellphone companies also pull your credit reports to check for any missed payments with other phone companies.
“There’s a very high default rate with telecommunications, just like with credit cards,” he says.
You must give consent for companies to access your credit reports. However, refusing consent may cost you money, too. The company could refuse your business, or they could just assume you’re an average customer.
“So you’re not going to get the best deal, you’re going to get a middle-of-the-road deal because they don’t know enough about you,” Tymoschuk says.
2. A good credit score can save you interest costs.
While it may seem obvious, credit scores can affect the interest rates on your debt. Not just credit card interest, either, but interest on business loans or mortgages.
The difference an interest rate makes to your bottom line is substantial, and if you have various types of debt accruing interest, a lower rate can be a significant help.
“Generally speaking, if your credit score is above 680 – which is considered good – you’ll get access to the best interest rates possible,” says Barry Choi, the finance expert behind Moneywehave.com.
“If your score falls below 650, there’s a good chance that creditors will only offer you loans at a higher rate since they’ll be concerned about you defaulting,” Choi says.
Consider a $300,000 mortgage over a 25-year fixed rate.
If your interest rate is 6 per cent, you will pay $84,675 in interest in the first five years you own your home. That leaves $269,510 remaining on the principal of your mortgage.
However, if you’ve snagged a 4 per cent rate, you’ll pay $55,845 in interest in that same five years, with $261,162 left to pay in principal.
That’s some serious money you can save, all because of your high credit score. “On a mortgage, you want to get the most favourable rate,” Glen says.
If the interest rate on your mortgage is too high, it can seem impossible to pay off your home loan.
“There’s no sense in getting a home at 8 or 9 per cent interest,” Glen says. “You’re better off to save your money than to attain a mortgage you’ll never pay off.”
3. A high credit score can grow your earning power.
Good credit not only can save you money, it also can help you make more in the future.
You no doubt have heard the phrase “it takes money to make money.” That means if you don’t have the capital for a big project in your pocket, you’ll have to borrow it.
If you have the chance to make an investment, good credit could give you the opportunity to get just the right loan.
It’s been said that owning your own successful business is the only surefire way to get wealthy. If you’re ready to take the plunge, you may need a lot of money to get started. A bank can grant you a business loan, provided you have a good business plan and a high credit score.
And if you expand your business through renovation, or the purchase of a new location, having access to credit also can help.
Or, when a rental investment opportunity pops up, you will need access to credit right away to purchase the property. Fast money can make it happen, and with the rental property you’ll take your asset column to the next level.
There are other ways to use your borrowing power to boost your income, too.
“Some people borrow money to invest (known as leverage),” Choi says. “If you have a high credit score and get a loan at a low interest rate and believe you can earn a higher return on the markets; then yes, you could potentially come out ahead.”
However, Choi warns there are risks involved in this strategy, so it won’t work for everyone.
On a similar note, a good credit score could give you the nudge you need to land your dream job. Employers have long used credit scores to judge risk and responsibility in a potential employee.
4. A good credit score gives you an emergency cushion.
If your credit score is high, you’re keeping up with your minimum payments, and you’re likely nowhere near your debt ceiling.
That means no harassing creditor calls, of course, but you also have some room for more debt, if suddenly you need it for an emergency or some other unforeseen circumstances. It also means if you do use additional debt, you’re likely well-versed in what it will take to pay off that debt.
A good credit score isn’t the only tool you need
Glen says a good credit rating doesn’t necessarily put you in the all-clear for financial health.
“I firmly believe that you should work at getting a good credit rating, but you have to watch your debt load,” he says.
Keeping a few accounts balance free, will help keep your credit score high. But he suggests you tread carefully around revolving debt and multiple credit cards.
“Having a good credit rating doesn’t mean that you can take on a certain amount of debt and just make minimum payments because the first time a hiccup comes along you’ll be coming to ask for help,” Glen says.
