Why good credit matters — even if you don’t plan to borrow

27 May 2020 by BEV O'SHEA of NerdWallet

Even if you don’t plan to borrow a dime, a good credit record is valuable. Think of it like a household fire extinguisher: It’s smart to have a good one even though you have no plans to use it.

And your credit can influence your life in ways beyond borrowing. Here’s why good credit is so valuable.

FLEXIBILITY IN A CRISIS, MORE OPTIONS IN GENERAL

If the coronavirus pandemic has taught us nothing else, it’s that we cannot count on things going as planned. Flexibility is key.

A good credit score can help you borrow at a reasonable cost. That in turn could help you buy groceries and other necessities even as your emergency fund is dwindling.

If you use investments to help pay living expenses, as many retirees do, access to credit may help tide you over when the markets are down.

Good credit can also be useful in leasing a place to live, because landlords sometimes check credit to evaluate tenant applications. Similarly, some employers check credit reports during the hiring process (although some jurisdictions restrict using credit reports in this way).

SAVINGS YOU CAN PUT (OR KEEP) IN THE BANK

Good credit also can lower some bills. Nationally, a good driver with poor credit would pay an average of $2,506 annually for car insurance. With good credit, the same coverage would cost $1,427. Only California, Hawaii and Massachusetts prohibit credit data from being used in setting car insurance rates.

Credit-based insurance scores are also used to set homeowners insurance premiums in most states, except for California, Maryland and Massachusetts. Poor credit can increase the cost “10% to 15% typically,” says Robert Hunter, director of insurance at the Consumer Federation of America. That works out to between $50 and $100 a year for most people, he notes. Renters insurance may also be higher for those with poor credit.

Utility companies often use information from credit reports to set security deposits. Georgia Power, for example, uses credit scores to decide whether customers must pay a deposit, which can be up to two times the average monthly bill for the residence.

If you do borrow money, a higher credit score can earn you a lower interest rate, and thus, lower payments. And a cash-back credit card (typically available only to those with good credit) can give you money back without you paying a nickel of interest if you pay the full balance each month.

HOW TO MAINTAIN GOOD CREDIT

You don’t have to go into debt to maintain good credit. The two biggest factors in your credit score, accounting for about two-thirds of it, are on-time payments and the amount of your available credit you use.

That means simply paying all your bills on time goes a long way toward protecting your credit. On the other hand, paying 30 days or more past the due date can devastate your score.

If you do use credit cards, paying the balance in full is the best way to manage those bills. Zeroing out the balance doesn’t hurt your credit score, saves you from paying interest and ensures you’re not using too much of your credit limit. If you can’t pay in full, try to stay below 30% of your limit.

Other strategies that may help:

- Keep credit cards open unless you have a compelling reason to close them. Even unused credit cards help your score by raising your overall credit limit. The average age of your credit accounts also has a small effect on your credit score.

- Ask a friend or relative with excellent credit to add you as an authorized user. That adds their credit history on the card to your credit profile. You don’t have to use or possess the credit card for this to help your score.

- If you are uncomfortable with a credit card, consider using it like a debit card by paying the balance as soon as a charge posts. The account adds to your credit history but you prevent worries about balances piling up.

Credit scores could drop during the pandemic as people rely more heavily on their credit and increase their balances. Your score can rebound fairly quickly once you pay balances down, as long as you continue to pay at least the minimum on time. If you need help paying creditors, contact them, preferably before you miss a payment.

This article was provided to The Associated Press by the personal finance website NerdWallet. Bev O’Shea is a writer at NerdWallet. Email: boshea@nerdwallet.com. Twitter: @BeverlyOShea.