Finances are an important part of your life. One of the best things you can do for finances is to build good habits early. While you probably know how important it is to live within your means and save up for what you want, the idea of establishing good credit early might not be on your radar.
However, establishing good credit early on is an important part of your finances. Here are four reasons to pay attention to your credit, even if you don’t think you need it:
- Qualify for loans
While it’s nice to think that you can live completely debt-free, that might not be feasible for some of your larger purchases, particularly if you want to buy a home some day. For most of us, saving up $100,000 to $200,000 in cash isn’t possible — at least not in a relatively short amount of time. In some cases, it might even be difficult to purchase a car without a loan (although it’s possible to save up enough to buy a car with cash).
One of the first things most lenders will do before they approve you is check your credit. Because your credit history is a reflection of how you’ve handled borrowing in the past, lenders have a look to gauge how likely you are to repay them. If you can’t be scored, it’s difficult to decide to loan you money.
To qualify for most larger loans, especially home loans, you need good credit. If you don’t have adequate credit, the lender might not provide you with the money for a big purchase. You might still be able to obtain a loan, but you will need to find someone willing to cosign on it.
Establishing good credit habits early can help you show lenders that you are responsible and that you can handle repaying a loan. While you might not care if you can use credit cards or buy a car on credit, you might want a mortgage some day, and good credit can help you.
- Pay less for loans
Even if you qualify for a loan with poor credit, you will pay a high price for it. If you look like a credit risk, lenders might give you the benefit of a doubt — but only trust you so far. To mitigate risk, the lender will charge you a higher interest rate.
Any time you borrow, you pay an interest fee. If you have good credit, the fee you pay will be much lower. Someone with good credit might be able to get a loan with an interest rate much lower than someone with poor credit. Excellent habits can lead to a savings of thousands of dollars over the term of a loan. When it’s a mortgage, the savings could run into the hundreds of thousands of dollars.
Starting now to build good credit could save you anytime you borrow, whether you carry a balance on your credit card for a couple of months, refinance your student loans or buy a home or car.
- Save on other services
Your good credit can also help you save in other ways. In some states, insurers are allowed to check your credit when setting your premiums. That means that if you have poor credit, you might pay more each month for car insurance. Even if the difference is only $20, that’s $240 a year. When you add up how much that could be over a lifetime, the numbers get bigger.
It’s also worth noting that some telecommunications and utility providers also require a credit check. I recently moved, and the local power company, cell phone provider, and Internet provider all required a credit check before approving me for service without a security deposit. If I didn’t have good credit, I would probably have been able to get services, but I would have had to pay money up front as a deposit. Some landlords also charge higher security deposits for tenants with poor credit.
- Your job could depend on it
While employers and potential employers aren’t supposed to look at your credit score, they can look at a version of your credit report. Not every employer will want to look at your credit report, but some do run your credit as part of a background check. If you will be working with sensitive information or money, some of the items in your credit history might raise red flags to potential employers. Your employer might worry that you will be susceptible to bribes or perhaps embezzle if you have money problems.
Before you dismiss good credit as inconsequential, consider what you might be giving up. You could end up missing out on financial opportunities, as well as spending thousands of dollars extra on loans and other services.