Now that you know how credit scores work, it’s time to find out whether yours is good, and learn why it matters.
Credit scores range from a low end of 300 to a high end of 850. According to one of the three national credit bureaus, they are divided into five groups:
Excellent: 800 to 850 (21% of the population)
Very Good: 740 to 799 (25% of the population)
Good: 670 to 739 (21% of the population)
Fair: 580 to 669 (17% of the population)
Poor / Very Poor: 300 to 579 (16% of the population)
You may not know which one of these categories you fall into. After you read the next section, you’ll see why it’s costing you money if you’re in a lower category.
Why do I need a credit score?
In simple terms, a higher credit score lets you do more things. Before you can rent an apartment, a landlord will look at your credit score. If you have a low credit score, you might need to pay several months of rent as a deposit. The same thing will happen when you try to pay for electricity or gas. Utilities companies will look at your credit score, and if it’s too low, they will also make you pay a deposit. With a high credit score, you can avoid this.
A higher credit score also means you can get a bigger loan with less interest. If you are trying to buy a car, a higher credit score means you can get a larger auto loan, and pay less interest each month. This can be the difference of hundreds of dollars every month. You might also get lower car insurance rates.
If you are trying to buy a house, a higher credit score means you can get a larger mortgage, and pay less interest every year. This can be the difference of $100,000 or more over the course of your mortgage.
If you are applying for a credit card, having a low credit score might mean you are stuck with cards with high APR’s and no rewards. If your credit score is Fair or Poor, you might only be able to apply for secured cards, which require a deposit and have very high APR’s. With a higher credit score, you will see lower APR’s, lower annual fees, and you can start to earn rewards like cash back. You’ll also get a higher credit limit which means you can use your credit card more
If you are buying a cell phone, a low credit score might mean you have to use a pay-as-you-go plan instead of a cheaper contract.
The good news is there are lots of ways to improve your credit score. Start by finding out what your credit score is.