Credit Score What it Means and Why Does it Matter

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Why Does My Credit Score Matter?

Asking yourself, “Why does my credit score matter?” For a lot of reasons, some of which you may not even be familiar with. You know that you need a solid credit score to get a mortgage or a car loan.

However, even if you’re not planning on getting either of those credit services in the near future — or any credit services at all — there are still reasons why you need to care about your credit score.

What Is a Credit Score?

A credit score is a way of distilling your relationship with debt down into a three-digit number. The scores run from 350 to 850 and vary based on the scoring formula.

For the most part, unless you’re actively seeking credit products, if your credit score is 650 and above, you won’t notice it in your day-to-day life. The problem comes in when your credit score dips below 650. Your credit score matters because the lower it goes, the more likely you are to default on debt in the eyes of creditors and lenders, and the more likely you are to receive higher interest rates on credit and loans.

Unexpected Consequences of a Low Credit Score

So, you’re not looking for a car loan, a mortgage or even a new credit card any time in the near future. Why should you care about your credit score?

  • A 2020 study conducted by the Society for Human Resources Management found that 47 percent of employers used credit checks as part of their hiring process.
  • Many mobile phone providers likewise run credit checks. T-Mobile estimates that fully half of all Americans don’t qualify for mobile deals advertised. In a worst-case scenario, you might be stuck with pay-as-you-go plans.
  • Nearly half of all landlords report that a credit check is in the top three factors when deciding who to rent to. So a bad credit card score might keep you out of the apartment you love. Additionally, landlords might request higher deposits or up-front rent payments.
  • Some car insurance underwriters charge higher rates from people who have less-than-ideal credit. According to Consumer Reports, even those with good credit could be paying hundreds more each year than those with excellent credit.
  • In the event that you do need to apply for credit or loans, you may not qualify for the best available products. That could mean higher interest rates and annual fees, and fewer perks.

Raising Your Credit Score

If you’re worried about any of the above, it’s worth putting some time into raising your credit score. Some actions that can help with this include using a credit card responsibly, such as paying every bill on time every month, maintaining a relatively low credit utilization ratio, and being thoughtful about when and how many new accounts you open over time.

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What is a credit score, and why does it matter?

Credit scores can be complicated, but what goes into them shouldn’t be a mystery.

Updated June 21, 2020

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There are a lot of options out there when it comes to credit cards, from best cards for saving money to the best cards for staying in hotels, to the best cards for traveling without planes, to the overall list of the best credit cards. But before you get the best credit card for, well, anything, you need to have a solid understanding of one very important thing: your credit score.

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Approximately half of Americans don’t understand the full impact of their credit score and what it can affect, according to a 2020 survey conducted by NerdWallet.

What is a credit score?

In the most simple of terms, a credit score is a three-digit number ranging from 300 to 850 that indicates how likely you are to pay off debt (some scoring models exceed 900, but those ones are rarely used, according to WalletHub). The higher your number, the better you’ve historically been at repaying things like your credit card balance, student-loan debt, car loan, or home mortgage. Credit scores can be calculated in many ways (more on that coming up), but a general rule of thumb is that a score above 800 is considered “exceptional,” 740-799 is “very good,” 670-739 is “good,” 580-699 is “fair,” and anything below a 580 is “very poor.” Most people have scores between 600 and 750, according to Experian, one of the three main credit bureaus that tracks consumer credit history and tabulates credit scores.

Future lenders, landlords, and even employers request this score as a means of evaluating the risk they’d take in going into business with you. The better your score, the greater the chances you’ll get what you’re applying for, and at a better interest rate if that’s a factor. “I like defining these terms based on the likelihood that you’ll be approved for the best deals lenders have to offer,” says credit expert John Ulzheimer, formerly of FICO (a credit score calculation model) and Equifax (another of the three credit bureaus).

These “best deals” can have a tangible effect on your net worth over time. For example, when applying for a $100,000 mortgage, someone with a high credit score might get a 4 percent interest rate, while someone with a lower score could get a 5.7 percent rate, according to credit expert John Bonsack. Over 30 years, this could lead to a nearly $40,000 difference in total payments.

How is a credit score calculated?

There are many different types of credit scores (“hundreds,” according to Ulzheimer), but the main ones are calculated by FICO and VantageScore using their own proprietary calculations. “[FICO and VantageScore] are two entirely different companies that build different scoring platforms,” Ulzheimer says. “Think Pepsi and Coke. Same industry, just competitors.”

For both, the most important factor is payment history. It accounts for 35 percent of a FICO score, and is described by VantageScore, which does not disclose its formula to the public, as “extremely influential.” Other factors for FICO are your amounts owed (30 percent), length of credit history (15 percent), your credit mix, or types of loans you have (10 percent), and any “new credit,” or how many credit cards you’ve opened in the recent past (10 percent). Other VantageScore factors include the percentage of credit used, and the type and duration of credit (both “highly influential”); total debt (“moderately influential”); and most recent credit behavior, and any inquiries on your account from potential lenders (“less influential”).

In addition, the three main credit bureaus, Experian, Equifax, and TransUnion, analyze and present an individual’s credit score for lenders. The scores are calculated differently based on the agency—according to Investopedia, Experian uses their own Experian/FICO V2 model, Equifax uses their own model that ranges from 280-850, and TransUnion uses VantageScore. Because of this, your credit score may vary slightly depending on the bureau you use.

How can you check your score?

Checking your credit score can be pretty simple. Many credit card issuers offer a free monthly check of your score, or even ongoing monitoring to flag any major changes. You can also use sites like Credit.com and CreditKarma, which offer free VantageScore summaries, but will charge for additional services such as credit monitoring, and may push you towards signing up for financial products once they know your credit score.

You may (and should) also request a free credit report listing your credit history, which you can do for free once a year per each of the three credit bureaus via annualcreditreport.com, the website that the federal government set up to help you access your reports. Although the reports do not contain your score, they include detailed information about your credit history and background and could reveal issues that may affect your score.

How can you get the best score possible?

Because payment history is the most important part of your credit score, it is unlikely that anyone will start off with a perfect 850. Instead, you must build it up over time to prove to lenders that you are capable of paying back debt. It can take up to six months to see a score if you’re starting from scratch, according to NerdWallet.

Many spending and repayment habits can make—or break—your credit score, but the top-line advice is, ideally, to avoid charging more than you can afford to pay off in full each month. With larger loans or balances, make at least the minimum payment required every month, with no skipped months (even if you’ve overpaid the minimum in the past). Remember: Your credit score provides evidence of your responsibility as a borrower, so you want it to show that you can reliably and consistently pay back any money that you owe.

What is your credit score and why does it matter?

Even after nearly a decade of sticking to responsible financial habits, I still get that familiar sinking feeling in the pit of my stomach when I know my credit score is going to be checked.

Way back then, I made all the classic rookie mistakes: Missing credit card payments. Forgetting to pay a hospital bill that ended up in collections. Ignoring a few (okay, dozens of) parking tickets. Going over my credit card limit. Applying for too many cards all at once.

Basically, I was a dumb college kid who had absolutely no idea how important credit is. I thought, no big deal. I’ll pay twice as much next month. Or, after I graduate college I’ll make plenty of money to pay this stuff off. I might have been getting an A in my Advanced Critical Theory in Modernist Literature class, but I was earning a big fat F in the real world.

Eventually I did realize that I’d dug myself into a very deep hole. And so I graduated college with my hard-earned English degree, no practical job prospects and a couple thousand dollars in past-due debt. This, finally, was my big wake-up call.

I was lucky enough to land a decent-paying job soon after graduating. So I spent the next several years methodically paying all of my bills on time, examining my credit reports for inaccuracies and paying my credit card bills off in full each month to boost my score. And of course, I had to pay off all my old debts first. By the time I hit 28, my credit was in pretty good shape. I had a score in the mid-700s and I was able to buy a house with my husband.

The moral of my story is, it took me YEARS to repair the damage I’d done, and I could have avoided it all if I’d treated my credit score with a little respect. Sure, it could have been a lot worse. But I definitely could have saved myself lots of stress, time and money.

Why does your credit score matter?

I know, I know — it’s easy to convince yourself that your credit score doesn’t mean much. And maybe if you ignore it, it’ll go away, right?

But in reality, if you’re smart enough to arm yourself with a good credit score, you’ll have WAY more access and opportunities than you would with a crappy one. A good credit score says something about your character. It means you’re responsible, and that you honor your debts. It means you’re someone who can be trusted.

Who looks at your credit score? Well, more people than you might think. Everyone knows your credit is checked when you apply for a credit card or loan, but it can also be pulled by someone who is considering hiring you or renting you an apartment.

And even though it might seem like it’s way far off in the future, when you decide you’re finally ready to buy a home, a good credit score can literally save you thousands and thousands of dollars each month. (That means you might be able to afford a house with, say, granite countertops, instead of the one next to a set of train tracks.) Typically, a score of 720 or higher is considered “good.”

Your FICO® scores

FICO scores are what most lenders use to evaluate your credit. You actually have 3 FICO scores, 1 for each credit bureau (Experian, TransUnion and Equifax). Each score is based on information that these credit bureaus keep on file about you. And as information about you changes, your FICO score is updated too. It’s all very Big Brother-ish.

In fact, your scores are probably different with each credit bureau, and there could be errors on 1 file that don’t appear on the other 2. It definitely pays to review your full credit reports on a regular basis to make sure nothing fishy is going on. You can get all 3 of your credit reports for free once a year at annualcreditreport.com.

However, you have to pay if you want to learn your actual FICO scores. There are a lot of websites that provide this service, but a good place to start is myfico.com. It can vary, but here’s how a FICO score typically breaks down:

  • 35% payment history
  • 30% amounts owed
  • 15% lengths of credit history
  • 10% types of credit in use
  • 10% new credit

And if you really want to over-achieve and get yourself a top-tier FICO score, you’ll need to pay extra close attention to these 2 things:

  • Maintaining an active credit profile, meaning you consistently use the credit granted to you AND you pay off your debts on a regular basis. Creditors need to see actual proof that you can manage your credit.
  • Maintaining a decent credit utilization ratio, meaning the amount of money you owe creditors versus your overall available credit. Most experts recommend keeping your utilization rate under 30%. (So if you have a total of $10,000 in credit available to you across all of your loans and credit cards, you’d want to keep the amount you actually owe around $3,000.) People with both very low and very high utilization rates have lower FICO scores.
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