Having good credit is not about having a financial badge of honor. It's the difference between having a hard life vs good life. It's about having more resources, opportunities, rewards, and flexibility. It's the ability to save thousands if not hundreds of thousands of dollars.
The best way to illustrate this is by telling a short story of twin sisters, Mary and Martha. Mary is an extravert with a spontaneous spirit. She loves going out, entertaining guests, traveling, and of course shopping. Martha is an introvert with a more conservative spirit. She loves everything Mary does but just on a smaller scale and with a bit more planning involved. Both have a heart of gold and currently work at the same hospital as registered nurses making $75,000 a year. So far so good.
Unfortunately, Mary's lifestyle and personality has caused her to have a low credit score. She maxes out her credit cards and sometimes late on her monthly obligations. The result: a credit score of 580. Martha on the other hand always pays her bills on time and keeps her credit card utilization below 30% and therefore her credit score is 780.
They've enjoyed living together over the past few years and have shared a car gifted to them by their parents. But now it's time to venture on their own. They both want to buy a car ($25K) and a condo ($160K). Let's see how their scores impacts them.
Impact of Mary's low credit score
For a $25,000, 5 year auto loan at 17.9%, by the end of the loan Mary would have paid about $13000 in interest
For a $160,000, 30 year mortgage at 8.6%, Mary would pay about $259000 in interest over time (over 2X the cost of the condo)
In addition, Mary's credit card APR would probably be over 28% due to her late payments and score. Her insurance rates would also be higher.
In essence, Mary would be losing money at every turn and most likely living paycheck to paycheck.
Impact of Martha's good credit score
For a $25,000, 5 year auto loan at 5.1%, by the end of the loan Martha would have paid about $3300 in interest (almost $10K less than Mary)
For a $160,000, 30 year mortgage at 3.9%, Mary would pay about $89000 in interest over time. That's a savings of $170K in comparison to her twin.
In addition, Martha's credit card APR would probably be ~ 8% and her insurance rates would be much lower.
In essence, Martha would have lower monthly payment, which means more disposable income that she could use to save and invest or just live as she please.
"Your credit score determines where you live, where you work, and potentially who you end up with in life."
Over the next 30 years, Mary would most likely have paid over $200K more in interest than Martha. Now imagine what Martha did what that $200K she saved over the years. Maybe she purchased a vacation home, invested in real estate, started a business, donated to charities, build a million dollar retirement fund. The scenarios are limitless.
So the moral of this story is to be a Martha. You can still live your life, just do so wisely. Live below your means, pay your bills on time and get your credit utilization below 30% (the lower the better). Even maxing out your credit cards and paying it off each month still impacts your score negatively. The YOLO, FOMO, or whatever O term you are chasing will leave you BROKEO. Take control and get your POWER back.
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