Welcome to Day 6 of the Master Your Money course!
Whether you want to believe it or not, your credit score can play a major role in your family’s life.
While you shouldn’t go crazy and completely obsess over improving your credit score, it is important to learn more about them due to the impact they may have.
Your credit score can influence the interest rate you receive on a loan, buying a home, finding a rental home, attaining certain jobs, your insurance rates, and more.
Even though your credit score can impact your life in a big way, that doesn’t mean it’s hard to improve your credit score. Yes, it can be easy to wreck your credit score, but it can be easy to improve your credit score as well.
Due to this, I believe a credit score can be used to a person’s advantage.
Below is my complete guide to credit scores, so you can improve your credit score, receive your annual free credit report, learn how to use your credit score to your advantage, and more.
What is a credit score?
A credit score is a three digit number showing others your creditworthiness, and is often used as an indicator of how risky you are.
There are three main credit bureaus, which is why you may occasionally see different numbers. The main three (Equifax, TransUnion, and Experian) calculate scores depending on the information they have about you, and your file may be slightly different at each of them.
What is a good credit score?
Lenders and people who are checking your credit score usually have varying opinions about what a good credit score is.
In general, though, a good credit score is usually 720+. The higher your number, the better your credit score.
Is it easy to damage your credit score?
Improving your credit score usually takes a little more work than it does to damage your credit score.
You may be hurting your credit score if:
- You have a high utilization rate. Keeping your balances below 20% of what you can borrow is important. For example, if your credit card limit is $1,000, try not to have a balance over $200. Lenders like to see a low utilization rate as it shows that you are not maxing out your debt.
- You cancel credit cards that may be helping your credit history.
- You pay your bills late or not at all.
- You never check your credit report and have errors listed.
Can my credit score impact buying a home?
This is a big reason why improving your credit score is so important.
- Your credit score can impact whether or not you are approved for a home loan.
- Your credit score can impact how large of a home loan you are given.
- Your credit score can impact the size of the down payment you are required to put down.
- Your credit score can impact your interest rate.
Read more at How Your Credit Score Impacts Your Home Buying Process.
Why is improving your credit score important? What else can it impact?
There are many instances in which your credit score and/or credit report may be looked at, and sometimes they have nothing to do with a loan. It is important to work on improving your credit score, because you never know when you may need it.
Plus, it’s something you can personally control, so why not work on improving your credit score?
Home and car insurance – If you have home or car insurance, your rate may be calculated on a factor you didn’t know about – your credit score. If your credit score isn’t good, then you may actually be paying more because companies consider you to be riskier.
Employer – This may be shocking to hear, but there are some employers out there who will check your credit report (with your permission). Industries that often check your credit report include those dealing with financial services, chemical, and defense. I recently read a statistic that around 30% of companies will check a potential new hire’s credit report before making a hiring decision.
Renting a home – If you have decided you don’t want to own a home, do not think you have escaped having your credit history checked. Your landlord will most likely check your credit history. They will want to know if you pay your bills on time or if you have ever skipped one completely. This will say a lot about you as a renter, whether you want to believe it or not. If your credit history is not up to their standards, you may be denied the rental altogether, you may be asked to pay multiple months at once, or you may be asked to find a co-signer just in case you fail to pay your rent.
Credit cards – If you don’t care about credit, then you probably will not care about this one. However, if you want a credit card, especially one with a good rewards system in place, then you will want to work on improving your credit score. The good reward credit card offers are usually only available to those with good or excellent credit scores.
Loans (home, car, etc.) – If you apply for a loan, your credit score and credit history will definitely be checked. Before you are approved for a loan of any sort, the lending institution is going to thoroughly check your financial history so they don’t end up losing money on your loan.
The interest rate you receive – A good credit score can mean you qualify for a good interest rate, and a bad credit score may mean that you get a very high rate. I have seen a 24% interest rate for a car loan for someone before! A higher interest rate can mean paying thousands of dollars extra, so it is always best to work on improving your credit score.
How can I check my credit score and my credit report?
My favorite site for checking my credit score is Credit Karma. Credit Karma makes it extremely easy to check your score and both me and my husband have active accounts.
You can also receive one annual free credit report from the three main credit bureaus mentioned above. Yes, this means that you get one from EACH, so three each year. I recommend spacing it out so you can get one every 4 months.
What makes up a credit score?
There are five categories that make up your credit score. Your payment history and amounts owed equate to 65% of your credit history, but don’t forget the others as they still have an impact.
If you want to work on improving your credit score, you will want to keep the below credit score breakdown in mind:
- 35% Payment History. Your payment history has the biggest impact on your credit score. This includes if you pay your bills on time, if you have missed a payment, if any of your bills have been sent to collections, and so on.
- 30% Amounts Owed. This is the next largest category when it comes to your credit score. This includes your balances, your utilization rate, and more.
- 15% Length of Credit History. The age of your accounts come into play here. This is why it’s usually a good idea to keep a credit card that you’ve had for a long time. I still have a credit card I opened when I was 18. It has no rewards, but it improves my average account age. However, only do this if you know you won’t go into debt.
- 10% New Credit. This category includes things such as how many hard credit inquiries you have and how long it’s been since you last opened a new credit account. It is important to remember that checking your own credit score does NOT impact this category as long as you receive your credit report from a company that is authorized to give you your credit report.
- 10% Credit Mix. This includes the type of accounts you have, such as whether or not you have credit cards, a mortgage, car loan, and so on.
So, how can I improve my credit score?
After reading all of the above, I’m sure you’re wondering how YOU can increase your credit score.
Improving your credit score is not extremely difficult. Once you realize what can impact your credit score, you can make relatively easy changes that will begin to improve your credit score.
Here are my general tips for improving your credit score:
- Make sure you pay all of your bills on time.
- Regularly check your credit report. There is a chance that mistakes may pop up on your credit report, and this may be hurting you. If you find an error, you should fix it as soon as possible.
- Keep your balances and utilization rate low. I recommend spending less than 20% of your available credit.
- Ask for your credit limits to be raised.
- Pay before your credit card balance is reported. Even if you pay your credit cards in full each month, your balances are still reported. To improve your credit score, you should pay your credit card in full before your balances are reported.
- Keep your credit card accounts open if it makes sense (if you think you’ll go into debt with them open or if the annual fees aren’t worth it, you may want to think about closing them instead), so that you can lengthen your credit history.
- When shopping for a loan, apply for loans within a short period of time instead of over several months.
This advice gives you the opportunity to improve your credit score so you can begin to use it to your advantage. Like I always say, though, make sure you are wise when it comes to your loan and credit card habits as you don’t want to go into debt.
Improving your credit score can be worthwhile, but taking on debt to do so is not.
Well, that's it for today. Tomorrow you will receive the next lesson that will tell you why you should be paying yourself first. Stay tuned!
Michelle Schroeder-Gardner MakingSenseofCents.com
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