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Oct 24

What’s Up With Your Credit Score?

Credit Score

Do you realize just how important your credit score is? It’s the deciding factor in a number of situations — strictly financial or otherwise — and it has the potential to make or break your financial situation.

It doesn’t really matter what your personal philosophy on credit may be. Fact is, many institutions place a lot of importance on that three-digit number of yours.

Fair or not, your credit score indicates how much of a risk you may be to their business.

It’s crucial that you know how your credit score can affect your financial plans and bills, how credit scores work, and what your credit score is actually comprised of.

How Having a Good Credit Score Can Help You

Good credit means more opportunities and better financial positioning in a variety of situations.

You’re more likely to qualify for the really great rewards credit cards if you have good credit. Those cards could provide cash back or points you can redeem for expenses like travel (rather than paying with your hard-earned cash). The better the rewards, the more stringent the requirements for the card. If your credit score isn’t above 700, you run the risk of being denied.

Interested in purchasing real estate, either for yourself or in the form of investment properties? Having a good credit score will make it easier to qualify for a mortgage with favorable terms and a lower interest rate — which saves you money over the life of the loan.

The same goes for any type of loan you’re interested in taking out. The better your credit score, the more favorable the terms of the loan will be for you.

You’ll also benefit from lower insurance rates, as most insurers are now using your credit rating to help them evaluate you as a property and casualty insurance client.

How Having a Bad Credit Score Can Hurt You

Soft inquiries are common from many companies these days. While that won’t have any impact on your score, it will influence how these companies see you.

Did you know inquiries can be made when entering a cell phone contract, or when you go to set up your utilities? All sorts of companies, big and small, want to know how responsible you are — and the easiest way (to them, in our current system) to do that is to check your credit report or score and make an assumption based off that number.

They are in the business of making money, and if you can’t pay on time, they don’t want the risk.

There are even some employers that are checking the credit reports of would-be employees, especially if they will be handling cash. If that sounds crazy, consider the fact that there are dating sites that exist that require users to share their credit score range. (Experian even wrote up a blog post about it!)

Let’s not forget about insurance, either. Companies can look to your credit score to determine whether or not to give you a policy. This is true for auto and homeowner’s/renter’s insurance. In their eyes, a lower credit score means you may be more likely to file claims.

Besides that, you’ll be subjected to higher interest rates on loans and lines of credit across the board. This makes loans and debt even more expensive for you — especially when considering big loans like mortgages.

How Credit Scores Work

The basics: you have 3 FICO scores from the 3 credit bureaus: Experian, TransUnion, and Equifax. They are separate companies and have their own ways of calculating your score, which is why all 3 may be different.

The best overall FICO score you can have is 850, and the lowest is 300. Your credit is considered excellent if your score is above 750.

Good credit is a score between 700-749 (the median FICO score is 723). Fair credit is 650-699; anything below that, and you could be in trouble.

It’s best to try and keep your credit score above 700 to reap the most benefits of having a good score.

What’s Your Score Made Of?

Now that you know what constitutes a good and excellent credit score, let’s go over the different sections that make up your score:

35% is your payment history. So pay on time, every time. Make this a priority! If you have a hard time remembering due dates, you might want to opt-in to automatic payments. At the very least, you should set reminders for yourself.

If you have a really good track record and make one late payment, it’s worth asking your lender if they’ll forgive you. In most cases, they’ll agree to sweep it under the rug especially if you pay in full.

Otherwise, payments made after 30 days will stay on your record for 7 years. (Yikes.)

30% is the amount you owe. Having a lower balance is always going to look better on your credit history. It indicates that you’re responsible with your money and know how to manage it. The more debt you have, the higher the risk you are for lenders.

15% is the length of your credit history. This is why starting early with credit is recommended, and why closing accounts is not.

10% is any new credit that you’ve recently been approved for. When applying for a loan or a new credit card, lenders will do a hard inquiry. This has the potential to lower your score by a few points.

(If you’re looking to apply for a mortgage, it’s generally recommended that you not open any new lines of credit until you’re approved.)

10% is the type of credit you have. Do you only have student loan debt? A car loan? A mortgage? Credit card debt? Lenders want to see what kind of experience you have with credit.

And remember, just because you know you’re responsible with credit doesn’t mean you should ignore your score and report. Pull your credit report once per year and check for errors or discrepancies. You can also use a service like Credit.com or CreditKarma.com to periodically check your actual credit score.