Why Credit Scores Are Important: How Credit Impacts Your Journey to Financial Freedom

Credit. It’s a loaded word, no matter who you are. Credit card debt can be crippling, and building credit can seem totally out of reach. When you’re looking for advice, you’ll often find conflicting ideas that leave you with more questions than answers.

You end up wondering, “Is credit good or bad? Why is it important to have good credit? And how important are credit scores, anyway?”

If you’re already struggling with credit card debt, building credit can seem out of reach. If you haven’t taken on any credit card debt yet, you might be wondering if trying to build your credit is worth the risk. 

That’s why this article is all about why credit scores are important and how a credit score can impact your financial future. 

Why Credit Scores Are Important

Credit scores are important because financial institutions use them to measure how trustworthy you are. A good credit score tells the person looking you up that you know how to manage your money and can pay your bills on time.

On the other hand, a bad credit score tells the person reading your report that you don’t have enough practice managing your money and can make them wonder if you’ll pay your bills on time. 

Why credit scores are important has very little to do with credit cards or loans. Credit scores are really all about whether people lending you money believe they can trust you. 

When you have a good credit score, you’ll never have to ask someone to “take your word for it”. You have solid proof that you deserve to be trusted with money, whether that’s a credit card, a loan, or even a larger purchase like a home. 

Let’s take a quick look at how good credit can open up your options for building your wealth. 

Photo by Avery Evans on Unsplash

Why Is It Important to Have Good Credit?

Now that we’ve taken a little look into why credit scores are important, let’s focus on why having good credit matters. 

Good credit can impact many things in your life. When most people think of things that credit score can impact, they usually stick to this list: 

  • Credit cards
  • Loans
  • Buying a vehicle
  • Buying a home

And those things are all impacted by your credit score. However, these aren’t the only times that having a good credit score will make a difference. 

These days, renting can be impacted by your credit score. If you have bad credit or no credit, you may need a co-signer to rent a home or an apartment. This is because, like credit cards or mortgages, renting also requires a monthly payment. Your landlord wants to be sure you can pay your rent on time. 

Credit Tip: Use a service like Credit Rent Boost or Rent Reporters to make sure on-time rent payments reflect on your credit score!

Rent isn’t the only other time your credit score can impact your choices. Insurance companies and banks also check your credit.

Insurance companies check your credit as part of determining your rates. This is why credit scores are important. Bad credit or no credit can communicate to the insurance company that you’re more of a risk to insure, driving up your rates. 

Banks check your credit score for a similar reason. People with bad credit or no credit are more likely to abandon or overdraw their bank account.  

This is why having a good credit score is one of the first things we recommend on your path to financial freedom. When credit factors into so many good life choices, it’s an essential part of your journey.

Is Credit Good or Bad?

Some financial advice will tell you not to bother with credit. “Don’t ever go into debt willingly!” they proclaim, “Pay everything in cash and never, ever open a credit card!”

This can make you wonder, “Is credit good or bad?”

While this financial advice is always well-meant, it is simply not realistic. We’ve listed some ways credit affects your daily life, even for people who are very good with money. When your insurance company, landlord, and bank account all want to know your credit score, it pays to have a good one.

The truth is, having no credit score doesn’t give the impression that you’re a financial wizard. More often, it gives the impression that you don’t have any experience managing money.  

Credit is neither good nor bad. It’s simply a communication tool, and it’s getting more and more crucial to financial success. 

How Credit Can Make or Break Your Financial Freedom

Credit scores can seem confusing and arbitrary. The good news is that the more you learn about credit, the less scary it becomes. 

As you begin your journey towards taking back control of your finances, you might wonder if building a credit score is even worth it. The answer is a resounding, “Yes!” Improving your credit score can take work, to be sure. 

Great credit scores are well worth the work you put into them. They help you lower insurance rates and replace vehicles more easily, but that’s not all. Good credit scores are a key part of building your wealth and diversifying your portfolio. In short, breaking the paycheck-to-paycheck cycle is why credit scores are important. 

For more help building credit, budgeting well, and learning to invest, sign up for our newsletter here at Millennial Dollar. We have tips, tricks, and advice for people who are invested in their financial freedom. We’re happy to be your advisor and guide on your credit-building journey.

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