So many aspects of everyday life depend upon credit scores. Even if you don’t realize it, people like these care very much about your score:
- Mortgage lenders
- Utility providers
- Auto loan lenders
It isn’t always easy to understand, but hopefully this will help break down the basics. A financial advisor can further help you plan to maintain or improve your credit score.
What Is a Credit Score?
Your credit score records, in numerical form, your record at borrowing money and paying it back. The three credit reporting agencies, Experian, Equifax, and TransUnion keep tabs on everyone’s borrowing record. Each gives you a score, ranging from 300 to 850, which purports to tell anyone interested how good a risk you are with money.
Of course, your credit score doesn’t tell the whole story about you. Maybe you have a rocky history, but you’ve pulled your finances together since. But potential creditors don’t know that until it shows in your score. If you want to improve your score, aim for at least 670, a good to exceptional score. But the higher the score, the better.
Why You Need a Good Credit Score
When it comes to where you live, landlords and mortgage lenders have a vested interest in ensuring you are capable of making timely payments. Having poor credit may get you denied the home of your dreams or may result in a higher mortgage rate.
Even utility providers will check your credit. Whether it’s for gas, electric, or your cell phone, credit checks are common factors in determining eligibility.
While employers can’t check your credit score, they can check your overall credit report. If your level of debt is too high in comparison to the salary, it reflects on your personal levels of responsibility and makes an employer hesitant to hire you.
Buying a car? Then be prepared to have your credit affect whether or not you qualify and what interest rates you receive if you do. Having a low credit score severely narrows your options in pursuing an auto loan. It isn’t impossible to buy a car with bad credit, but it’s much more difficult and leaves you susceptible to bad rates and even worse financial practices.
How to Boost Your Score
Several factors come into play when calculating your credit score:
Paying on time is one of the most important elements to maintaining a solid credit score. Late or missed payments can stay on your credit score for seven years, although the severity in which they affect your scoring will decrease over time.
Credit utilization is the balance of how much you owe relative to the limits on your lines of credit. Generally, you want to keep your credit utilization under 30%. Paying more than the monthly minimum can help keep card balances low, and therefore the credit utilization.
Length of credit history
Another key factor is how long you’ve been building credit. Having a good history where you’ve taken on loans and made regular payments with few to no late fees establishes trust. An account must be active for at least six months before a credit score can even begin generating, but generally having a credit history of at least two years is needed to start reaching good score ranges. If you have children, encouraging them to start building a good credit early can set them up for a good score later.
Applying for new lines of credit will impact your credit score because lenders will run an inquiry before approving your loan. Too many inquiries on your record may indicate that you’re taking on more debt than you can manage.
Don’t be tempted to close up old accounts either due to negative history. An old account can take seven to ten years before it’s removed from your credit report, but that negative history will impact your scoring less and less every year.
Credit mix refers to the different kinds of loans in your history: auto loans, personal loans, mortgages, etc. Lenders like to see that you’re able to responsibly manage various types of financing. Credit mix isn’t as important as payment history or credit utilization, however.
Make sure to monitor your credit scores on a regular basis. Because of the Fair Credit Reporting Act, every major reporting agency grants one free credit report per year. Take advantage and request a report from each regularly. If you see any discrepancies, report them right away to all three major agencies: Equifax, Experian, and TransUnion. Any information deemed inaccurate, incomplete, or unverifiable must be expunged or corrected within 30 days.
Understanding credit scores is not intuitive and is definitely confusing. Some actions which you might think would help credit may actually harm it, and vice versa. However, this is a number which influences a large portion of your life. Contact us to be connected to an experienced financial advisor.