People are waking up to the fact that it's important to take the actions that help establish a healthy credit score while they are still young. They're educating themselves on financial best practices that enhance creditworthiness and lead to empowerment—not debt.
Still, credit can be a confusing topic to wrap your head around if you don't know much about it. What's the point of having a credit score and why does it really matter? What's considered a good credit score and what credit score does it start at? And how can it help me—both in the short term and the long run? Let's answer these questions and more below.
What is credit?
Before diving into why credit matters, let's start with the first question we need to ask—what is credit?
How you manage credit affects other aspects of your financial wellness—including your credit history, creditworthiness and of course, your credit score.
Credit scores are 3-digit numbers that serve as a measurable way of showcasing your ability to manage finances. It helps both your lender and you with financial decisions, such as what kind of rates you'll be able to get and how high your credit limits can be.
This word "credit" is nuanced and used in many different contexts—whether you're talking about credit cards, credit limits or revolving credit. Credit is a key term when discussing finances. It's complicated and can mean many things, but it comes down to the ability to borrow money or access goods or services with the understanding that you'll pay later. It is also a cumulative representation of your capacity to manage your finances (and not an evaluation of your value as a human).
Good credit scores give you access to more opportunities and increased purchasing power. To a lender, good credit is a way of indicating that you are reliable and responsible. Bad credit, on the other hand, can limit your ability to get opportunities you may want and can indicate to a lender that you may be a risky investment.
When you enroll in Chase Credit Journey®, you'll receive a free Experian™ credit score and report. This will show you what your current score is and the factors contributing to that score, which include but are not limited to: payment history, credit mix and credit utilization ratio.
Your credit score reflects the financial choices you've made over time, such as paying off debts, lowering your credit utilization ratio or opening a new credit card.
Credit can also be broken down into other contexts, including:
- Credit history—ongoing record of your payments towards your debts.
- Creditworthiness—how eligible you are for receiving lines of credit.
- Credit scores and their ranges—these numbers vary and can help or hurt you in the long run.
Myths of credit
Credit is an essential tool to have in your back pocket—but don't be fooled by some of the myths you might've heard about it. Let's debunk some of these myths below.
Myth 1: Everyone starts with a high credit score
Contrary to some opinions out there, you do not start with a high credit score only to have it impacted by poor decision making—or if you're savvy, maintained. Your credit score is a reflection of your cumulative financial choices. For example, let's say you buy an expensive pair of shoes. When you make your credit card payments on time and in full, you're increasing your payment history, an important factor when it comes to calculating your score. Your credit score can start to slowly improve over time as you make more responsible choices like these.
Myth 2: Credit scores don't really mean anything
So you receive a number that tells you whether or not you have a good credit score—what's the big deal? It's just a number, right?
Unfortunately, many people can have this mindset up until the time they realize that they can't take out a loan for a car or sign a lease for an apartment. These major life purchases and milestones are often contingent on how good of a credit score you have. While you may not be thinking about these decisions right now, what you do today can impact your score in the future. If you don't implement healthy habits, your score and financial well-being could suffer.
Myth 3: Checking my credit score will hurt it
When you check your own credit score, such as with Credit Journey®, you are not hurting your score. The only time your score can be impacted is if there's a hard inquiry on your credit, such as when a lender wants to review your credit report prior to granting you access to a new credit card. And even then, the impact is temporary and small—your score may drop only a few points, which can be improved with smart financial choices over time.
Myth 4: An app can fix my credit score
If you're concerned about your credit score, you may be tempted to do something simple and easy to fix it, such as downloading an app that claims to fix your credit score. Unfortunately, credit is not simple—and there are no magical fixes that can be automatically rendered. If you want a realistic picture of how you can improve your credit score, try enrolling in Credit Journey and signing up for a customized action plan to help you improve your credit score.
Advantages of having good credit
The advantages of having good credit are essentially endless. A good credit score is a VantageScore® of about 661+ and a FICO® score of about 670+.
Whether you're 18 or 80, having a good credit score opens up many doors for you, including but not limited to:
- Receiving good annual percentage rates (APRs) on loans and mortgages
- Having a lower APR on your credit cards
- Getting approved for leases, mortgages and loans
- Gaining access to higher credit limits and opportunities to receive points or rewards
Disadvantages of a low credit score
Just as credit can open up doors, it can also close them on opportunities if you're not careful. Having poor credit can make it difficult achieve your financial goals. For example, a poor credit score could:
- Limit your ability to get a good APR on a loan, mortgage or credit card
- Prohibit you from getting access to higher credit limits or other types of credit cards
- Prevent you from getting approved for a lease
- Make you appear ineligible or risky for an employer that runs background credit checks
Once you have bad credit it's not always simple to pivot and get back on the right path. It takes time and discipline to improve your credit score, but if you are dedicated to this goal, you should see improvements over time.
What can lower your credit score?
Your actions reflect what happens to your credit score, both for better and for worse. The financial decisions you make today could affect what your score looks like in the future, so establishing good habits and avoiding bad ones is key.
Some ways you could lower your credit score include:
- Having hard inquiries run by a potential lender or issuer
- Late or missed payments towards your credit card statements
- Having a high utilization ratio
- Being inconsistent with making your payments on time or in full
- Closing credit card accounts
Of course, these are just a few of many ways you could significantly diminish your score. If you file for bankruptcy, for example, and have a derogatory remark on your report, your score could decrease even further.
Building and maintaining credit
Don't worry, all is not lost—however, those with poor credit scores will need to make a concerted effort to change their behavior around credit and demonstrate that by making regular, timely payments and demonstrating to lenders that they are reliable, low-risk candidates for loans.
Now that you can see how a good score can benefit you, here are a few ways you can build credit score and maintain it:
- Enroll in Chase Credit Journey (and set up a score goal to get actionable tips to help improve your score)
- Lower your credit utilization ratio by paying off credit card debts and adjusting your budget
- Make payments on time and as much as possible
- Diversify your credit mix by taking out a new credit card (this may hurt your score initially, but can help improve it in the long run)
- Monitor your credit score with Credit Journey's credit monitoring and identity monitoring services
At the end of the day, having a good credit score isn't about doing (or not doing) just 1 thing—it's a culmination of healthy habits built up over time to achieve the financial foundation you need to live a happy, healthy life. Whatever your life goals are, having a good credit score will help you significantly on your journey.