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Why is my credit score important?
How credit scores impact your life
Whether you like it or not, your credit score has a massive impact on your life. That one little number can determine whether you get a cell phone, a student loan, or even a new car. Furthermore, it has a massive impact on where — and how — you live. Even if you’re not aware of it, your credit history has been tracked behind the scenes your whole life, and lenders, employers, and others use it to make some pretty important decisions about you and your future.
Here are a few examples including answers to basic questions and implications about your credit score and what it means to you.
|Where you live||In most cities, your landlord will evaluate your application to rent an apartment, and it includes your credit check.|
|Car loan||The lower your score, the higher your interest will be if you need a car loan.|
|Employment||If you’re applying for a job that involves managing money, a company may see a poor score as evidence that you’re undisciplined or that you make poor choices.|
|Living expenses||Nowadays, many providers check your credit, from cell phone companies to utilities, so having good credit lets them know you’re responsible and will pay promptly.|
|Additional credit/loans||If you have a low credit rating because you’re overextended with the amount of debt you’ve accumulated, then it’s likely you’ll be turned down if you apply for other loans, like credit cards or student loans — or look to refinance at a lower interest rate.|
|A future house||If you have a poor score, you could end up with a high-interest rate or, if it’s bad enough, you might not be able to get a mortgage at all!|
What is my credit score and how does it work?
Your credit score is one of those numbers that are extremely important in your life. When the time comes to buy a house, no one will really care about your SAT score or your shoe size, but they’ll certainly look at your credit score. So, what is it?
Simply put, your credit score is a simplified snapshot of your financial situation. Credit scores were created so that potential lenders can quickly see what state your finances are in and whether you’d be a good candidate for a loan. They’re looking for people who can and will pay back their loans in a timely fashion, and this is one of the primary tools they use to make that decision.
What format does my credit score come in?
As we mentioned, your credit score is a number, kind of like a QB rating or an aggregate Yelp review. There are two different formulas that measure your credit score: FICO and VantageScore.
The vast majority of lenders use the FICO score, but VantageScore has gone through several iterations and has become more popular over the past 15 years or so. Both scores measured on the same scale of 300-850 (why they didn’t just make it, say, 0-1000 and simplify things is something we don’t want to even get into!), the higher the number the better. If your score is in the 800s, you’re golden, but if it’s around the 400 range, you’re not well-positioned to get a good loan.
Here’s a basic idea of where your credit score ranks:
In addition to the traditional credit score, FICO has recently developed a new metric, called the Resilience Index. This is a score between 1-99, with 1 being the best, that measures how well you’ll be able to deal with difficult financial situations, like a nationwide recession.
This measurement is fairly new and untested, but it represents a new metric that financial institutions can use to see how you can deal with periods of economic volatility.
What goes into your credit score?
Like a good (or, for some of us, a not-very-good) meal, your credit score is made up of a lot of different elements, and it’s important to understand what those elements are so you can know how banks and lenders view them — and what you can do about them.
Many factors contribute to your credit score. These factors include:
- Your payment history: Have you paid on time? Have you ever fallen behind? Banks like to look at patterns, and this is one they find informative.
- How long you’ve had credit: Believe it or not, having NO credit history is a bad sign to banks since that makes you an unknown quantity. If you’ve had credit for a while, they feel comfortable analyzing a pattern.
- Your credit mix: What kind of credit do you have? Credit cards? A car loan? A mortgage?
- Current amount owed: How much money do you owe on all your lines of credit? If it’s a lot, that can be a bad sign.
- New Credit: You may have heard that you shouldn’t get a new credit card if you want to get a home loan. This is good advice, as new lines of credit usually have a negative impact on your credit score.
It’s important to note that your credit score doesn’t take into account non-credit-related financial information. Here are some things that don’t go into your credit score:
- Your income
- Your savings
- Other factors (Education, job title, etc.)
Just keep in mind: having a good job and lots of money in savings and investments is great, but it has no influence on your credit score. That’s only a snapshot of the lines of credit you’ve had and how you’ve repaid them.
How do you access your credit score for free?
So, you want to know if your credit score is up to snuff if it’s good enough to position you to buy a house? Well, then, you better take a peek at it. But how?
Before we get into that, let’s get one thing straight: checking your credit score will not lower it. This is a common misconception, and it’s just not true. It’s a good idea to periodically check your credit score, especially if you’re planning on getting a home loan.
You can — and should — check your credit regularly. That way, you can see if it drops and address the situation quickly and efficiently. There are many services that offer free access to your credit score. Your bank or credit card may offer this service to you already, so it’s a good idea to ask.
There are three major bureaus: TransUnion, Experian, and Equifax. Your score may be slightly different from each bureau (because of slight differences in reporting), so you may want to check them all.
How do you improve your credit score?
There are a few steps you can take to improve your credit score. Some of them are simple, some of them take a little more effort, but they’ll all go a long way toward bringing you up to where you’d like to be. Here are some suggestions:
- Don’t open any new accounts
- Pay off some of your debts
- Monitor your credit and dispute inaccuracies
- Keep your balances low
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