You already know that your credit score is important. But sometimes it takes a hit when we experience life events like going through a divorce. I know this happened for me and it’s taken dedicated work to improve my credit score. Your credit score can affect the interest rate you pay on loans, how much your insurance costs, and even impact your job prospects. Fortunately, there are many apps and websites that will help you check your credit score.
What is a Credit Score (And Why Does It Matter)? Your credit score, also called a credit rating, is a three-digit number that’s designed to help lenders understand your credit-worthiness. While every person has different credit scores issued by various companies, the most popular credit scoring company in the United States is Fair Isaac Corp. (FICO). FICO scores (and most other credit scores) range from a low of 300 to a maximum high score of 850. This number is used by lenders to determine how risky it is to give you a loan. Generally, the higher your score, the more likely you are to pay back your loan on time. Your credit score is based on five factors including:
- Payment history (35%)
- Amount owed (30%)
- Length of credit history (15%)
- New credit requested (10%)
- Types of credit in use (10%)
Your payment history is the most important factor in determining your credit score. The credit scoring company is looking at whether you’ve made all your payments on time. If you have any late payments, it considers how late you were (30, 60, or 90+ days), and whether there were any charge-offs, debt settlements, or accounts that were turned over to collections. Bankruptcies and foreclosures are also factored in.
The second most important factor is how much you currently owe because lenders want to make sure they’re not giving you more credit than you can handle. Someone who has a $10,000 credit limit with a $2,000 balance will rate better than someone with the same credit limit and an $8,000 balance.
Next in priority is the length of your credit history because it shows how long you’ve been using credit. A longer history is better, but only if it’s free from negative marks. Since your credit history only has a 15 percent weighting, those with a short, but clean, history can still achieve a respectable credit score.
Requesting new credit frequently can lower your score. This is particularly true if you’ve made a significant number of requests in a short time period. Lenders might see this as a warning that you’re in financial trouble or are preparing to rack up a lot of debt.
Finally, having a good mix of different types of credit (ex. mortgage, auto loan, and credit cards), will help improve your credit score. Lenders like to see that you’re able to handle both short-term and long-term debt and have a mix of both secured and unsecured credit.
What’s Considered a “Good” Credit Score? Generally, lenders place you in a category depending on your credit score range.
Bad = 300 to 629; Fair = 630 to 689; Good = 690 to 719; Excellent = 720 to 850
The range you fall into will impact your life in many ways. The most obvious occurs when you need to borrow money. Not only will your credit score impact whether you’re approved for a loan, it also affects the interest rate you’ll have to pay. Don’t think that’s a big deal? Consider this example:
If a person with excellent credit applied for a 30-year, $200,000 fixed mortgage and was offered a rate of 3.6 percent, he or she would pay approximately $190 per month less than someone with poor credit who was offered the same loan at a 5.2 percent rate. Over the lifetime of the loan, this seemingly small difference would add up to an astounding $70,000 in additional payments… all because of a difference in credit score!
Unexpected Ways You’re Impacted by Your Credit Score Many people don’t realize that your credit score is used for more than just lending decisions. In fact, it can impact many different areas of your life including employment, housing, and insurance.Almost half of all employers check the credit of potential applicants before offering them a job. Most landlords will check your credit score before renting you a house or apartment. A poor credit score can cause denial of your application, or your landlord might require you to put down a larger deposit. Most mobile phone deals are contingent on a good credit score, and a poor credit score might prohibit you from opening a mobile phone contract at all. A poor credit score may also result in a significant up-charge on your auto insurance premiums.
When applying for a credit card, scores in the good to excellent range will give you greater access to offers like zero-percent interest, sign-on bonuses, and higher cash-back offers. Now you know why I think it’s so important to get that credit card debt paid off! I can work with you to put together a debt repayment strategy that will relieve your stress and improve your credit score. Check out my website at https://lindalingo.com/