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When You’re Starting Out, Good Credit Can Ease the Way

May 25, 2018
Loans, Student Loans
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The need for credit sneaks up on you, like your first gray hair.

If you want to rent an apartment, buy a car or maybe even get a job, you’ll need to demonstrate a history of dealing with money responsibly and paying bills on time. You’ll show that with a good credit score, a three-digit number that signals how financially trustworthy you are.

Good credit won’t make a pimple disappear right before a date. But here are three other ways it will make your life easier.

1. You’ll save money on your student loans

After you graduate from school, get a full-time job and build strong credit, student loan refinancing could reward you with a lower student loan payment or interest rate. You’ll need a credit score of 690 or higher to qualify — unless you use a co-signer — and solid income. Refinancing a $30,000 balance from an average 7% interest rate to 4% will save you about $45 a month and about $5,350 over 10 years.

When you refinance student loans, a lender pays off your existing loans and offers you a new one, with better terms, based on your credit history and other factors. An added benefit? Because refinancing turns multiple loans into one, you’ll have fewer accounts with balances on your credit report. That can improve your score, says John Ulzheimer, a credit expert who formerly worked in the credit industry.

Federal loans become private when you refinance, and they come with benefits private loans don’t offer. Use caution before including them in the bundle.

2. You’ll get credit card freebies

Good credit means access to rewards credit cards, which can get you airline miles, free hotel stays and other perks. But the most valuable benefit for 20- and 30-somethings might be the cash back that some premium credit cards offer, and the chance to transfer a balance to a card with a 0% APR for a period of time. That helps you avoid paying interest as you pay off debt.

“Free money in my mind is the best reward ever,” Ulzheimer says.

With good credit, you’ll also likely receive a higher credit limit. That means you can spend the same amount as someone with a lower limit, but your credit utilization — the amount you owe compared with the limit — will be lower. That will help your score.

In fact, you can request a credit limit increase to speed up the process, says Daria Victorov, a certified financial planner at Abacus Wealth Partners in San Mateo, California. The best time to do so is if you’ve recently gotten a raise and you already have good credit. The request could appear as a hard inquiry on your credit report, making it dip.

3. You’ll pay less for car insurance

Insurance companies can use your credit history to determine how much you pay for car insurance everywhere but California, Hawaii and Massachusetts. A recent NerdWallet analysis found that drivers with bad credit can pay up to $464 more per month than those with good credit. Always compare quotes, and consider shopping for car insurance again later on if your credit improves.

To qualify for cheap car insurance, fancy credit cards and student loan refinancing, the same playbook applies: Pay all your bills on time, keep credit card balances below 30% of your credit limit, and pay off credit card purchases by the end of the month.

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