Anyone struggling with debt is also probably dealing with the fear and frustration of having a low credit score. In modern banking, credit scores determine everything from getting a loan to renting an apartment.

But what exactly is the value of having a good credit score? And is it necessary to achieve debt freedom or live a good life? We’ll cover these questions and more in our simple guide to help you better understand credit scores. In it, you’ll learn:

• What a credit score is and its purpose 

• When good credit is required 

• How to manage a solid financial future with less-than-perfect credit 

• The value of credit-building strategies 

With these tips, you’ll feel more confident and less stressed while engaging in everyday financial tasks. Plus, you’ll understand how to manage your credit score to create a better financial future for yourself. 

What is a credit score, and why is it important? 

A credit score is a three-digit number that lenders use to determine how likely you are to repay what you borrow. 

Three leading credit score companies provide this number, so it’s common to hear it referred to as a TransUnion, Equifax, or Experian credit score. The number is determined based on your credit report, a complete record of how you have managed debt throughout your history.

Factors that go into calculating your score include:

• Payment history: Are you making your required payments on time?   

• Outstanding debt: What percentage of your available credit are you using, and what is your total debt amount?  

• Credit age: How long have you managed your accounts and credit?  

• Types of accounts: What is the mix of unsecured (like credit cards) and secured (like home loans) debt you hold?  

• Inquiries for new credit: Are you applying for new lines of credit or loans? If so, how often? 

What is considered a good credit score?  

Each of the three leading credit score companies has its own charts (depending on whether it adheres to FICO® or VantageScore); however, they all provide the same general indicators. Generally, a 600 credit score and 650 credit score are considered fair, while a 700 credit score and 750 credit score are considered good.

Pro Tip #1  

Get a free credit score report today – it’ll save you time and trouble. But make sure it’s the main one you get per year. Otherwise, a hard credit inquiry occurs and can impact your credit score.

Traditionally, a credit score is essential as it is the foundation for borrowing money to improve one’s quality of life and establish trust with creditors. 

But that isn’t always the case. 

When is good credit needed?

The biggest myth about consumer finance is that good credit is vital for a good life. But good credit doesn’t actually buy you anything. In fact, the whole point of having good credit is to allow you to borrow money on terms in your favor rather than directly purchasing something.  

For example, having good credit is essential if you want to purchase a house, car, or other expensive transaction. It may help you secure better rates and terms on the loan, allowing you to pay off your debt faster and at a lower cost.  

On the other hand, if you need some cash for an emergency or short-term expense, a vacation, or shopping, then good credit won’t really be necessary. You can often find ways to pay these expenses without a high credit score. 

So, if you are stressed about purchasing with poor credit, don’t fret. You may meet more criteria than you’d think when performing everyday financial activities with less-than-perfect credit. 

How to manage a solid financial future with less-than-perfect credit 

While poor credit is not ideal, it doesn’t mean you can’t achieve your goals. Many people with low credit scores live happy and successful lives. The truth is that several other factors are important in any loan process, and keeping your credit score in check is just one of them but not always the most important.

For example, those with low or poor credit scores (<580) may still qualify for a loan if they have other assets or factors in their favor. This could include having a steady income, enough savings to cover the loan payments, and responsible payment habits with proof from past utility bills and rental agreements.

But here’s the good news: you don’t need the highest credit score to set yourself up for success. Be aware that failure to keep up with loans and payments when you have less-than-perfect credit can further damage your score.

To avoid this, establish a budget and stick to it — even when times are tough. It’ll help you stay on top of payments, protect your credit score, and improve your financial position if you apply for other loans or lines of credit in the future.

The value of credit-building strategies 

Credit-building strategies help establish and maintain a good credit score to achieve financial freedom. They are also vital to building a solid financial plan that helps get you out of debt and into a stress-free life. 

Secured credit cards 

A secure credit card can be a great way to get the credit you need while building your score. These cards require a deposit used as collateral if you default on payments. They generally have lower interest and fees than unsecured cards. Issuing banks report your payments to credit bureaus, helping you build your credit history over time.

Payment reminders  

Paying bills on time is one of the best ways for anyone with a low credit score to start rebuilding it and staying on track. Payment reminders help you pay monthly bills on time and in full.

Pro Tip #2  

A reminder isn’t the actual payment. If you have trouble following through, set up automatic payments to have the money taken out of your account before you have a chance to forget.

Regularly check your credit report  

Sometimes, your low credit score may be due to an error from the credit reporting agency. Check your credit report regularly to address any errors or factors that may damage your score immediately.

Low credit? No problem!  

Credit is only one of many factors used in major financial decisions, like loans and mortgages. So, if your credit is less than perfect today, don’t worry. Many options are available to help you get by as you build up your score. With the right strategies and help, even low credit scores won’t keep you from turning your financial goals into reality. If you’re in debt and have a low credit score, prioritize paying off the debt first. From there, you can focus on improving your credit score for long-term financial health.

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Disclaimer: The information provided in this article is for general informational purposes only and is not intended as legal, financial, or professional advice. Clarity Debt Resolution Inc. (“Clarity”) does not guarantee any specific outcomes, and results may vary based on individual circumstances. Clarity complies with all applicable laws, including the California Debt Settlement Services Act, and recommends consulting with an attorney or financial advisor before making any financial decisions. Clarity is not responsible for the accuracy of external links or content, and all website content is protected by copyright laws. We reserve the right to update or remove content at any time without notice.