Sure, you have heard about credit scores and that everyone has one. But do you know why your credit score matters? Do you know how to find your credit score? This quick guide will help you with the basics of what a credit score is, why good credit matters and how to improve it.
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Why a Credit Score Matters and How to Improve It
What even is a credit score?
Your credit score is number, usually anywhere from 350-800, that is a compilation of factors:
Payment history – Do you make your payments on time? It is important to pay every single payment on time. Payment history is a big chunk of what makes up your credit score. It shows creditors how reliable you are.
Credit Utilization – It is suggested to keep your credit card utilization under 30% of your total available credit. Your debt to credit ratio is the amount you owe divided by your total credit limits. Say your credit limit is $10,000 and you owe $1,500. Your debt to credit ratio is 15%, which is really good because it is under 30%.
Length of Credit History – It is important to keep credit cards open and use them monthly and then pay them off monthly. The longer you do that, the better your credit history will be. A long term loan, such as a mortgage, will provide a lengthy credit history.
Credit Mix – Do you have some old accounts and new accounts? That is good, it is showing that you are still credit worthy.
Type of Credit – Do you have a mix of credit cards, vehicle loans, personal loans, student loans or a mortgage? This shows how trustworthy you are because different types of lenders are willing to extend you credit.
Your Credit Score Matters
If you live in the Dave Ramsey world, you will constantly hear that your credit score, or your Fico score, does not matter. But, for those of us that live in the real world and need credit from time to time, your credit score DOES matter.
Jobs – Yes, your prospective employer could look at your credit report, it depends on the responsibilities held at the job you are being considered for.
Buying a first car out of college – You may have to finance a car if your clunker that got you through college is not going to last much longer.
Refinancing student loans – You may want to consolidate or try to get a lower interest rate in the future when you have a solid work history.
Buying a house – There will come a time when you may be ready to buy a house.
Renting an apartment – Many companies pull a credit report when renting their units.
Refinancing your mortgage – Interest rates go up and down over the time of a mortgage. It may be in your best interest in 10 years to try to refinance your mortgage.
Home Equity Loan/Line of Credit – Major house repairs happen, or you may decide to renovate the kitchen or add on to your house one day.
Your credit score represents how much of a risk you are to lenders. If you have a low score, say below 600, you could be considered a high risk. If your score is above 700, you are more than likely a low risk and will qualify for low interest rate offers and lenders will be more eager to lend you money.
There are different types of credit scores, such as FICO, Vantage and each one of the credit reporting bureaus, Experian, Equifax and TransUnion all use their own scores. Don’t get too hung up on the different types of credit scores, just make sure yours is at least in the “good” range and strive for “excellent”.
Do you see why your credit score matters?
Bad credit really matters too. It can prevent you from so much. If you have bad credit, you will have to pay higher interest rates on credit cards or car loans. It can prevent you from refinancing your house to a lower rate. You may not be able to co-sign for your child’s student loans. If you have poor credit, you might not be able to get that home equity loan for a much needed new roof. I have had to repair bad credit, believe me when I say it is not fun, so take care of your credit right now!
It is SO SO SO IMPORTANT to continually monitor and try to improve your credit score.
How can you find out your credit score?
Why you should be monitoring your credit score every month.
If you sign up for Credit Sesame, you will get alerts emailed to you. Anytime your score rises, or falls, you will receive an email. It is especially important in this day and age of fraud that you monitor your credit.
Credit Sesame is 100% free and super easy to use.
If someone gets ahold of your social security number somehow and they try to open a credit card or take out a loan in your name, you will be alerted that there is activity on your account. You can then take action and remove that activity.
Make sure to dispute any errors that you see. You can do this right on the Credit Sesame website. It is super easy and is usually completed within 30 days.
You can also sign up for MyFico, it is not free, but many lenders base their lending off the Fico score.
Every year, you are eligible for one free credit report and you can obtain a report from all 3 credit reporting agencies through AnnualCreditReport.Com
How to improve your credit score
Pay your bills on time – Keep up with your due dates and ALWAYS pay on time or a little early. Since this is one of the biggest factors in calculating your credit score, it is one of the most important things that you can do to improve your credit score.
Pay off old (delinquent) debt – If you have an old cell phone bill or medical bill sitting on your credit report, get it paid off and ask for it to be removed from your credit report.
Use less than 30% of your credit limit – Again, your credit usage should only be 30% (or less) than your total credit available.
Keep old accounts open – It is really important to keep some of those old accounts, such as credit cards that are paid off, open. It will increase your debt to credit ratio.
Some people will apply for new credit cards just to get a higher total credit limit and improve that debt to credit ratio and build credit. I have done it while trying to build my credit back up after the dumb financial mistakes I made that resulted in a poor credit score. It is totally fine and acceptable, as long as you know that you will not be using that card to go out and shop on a whim. That card has a purpose, to increase your credit score. Increasing your credit score has a purpose, possibly to get a lower interest rate on your next home purchase. Whatever your reasons are, remember them.
Now that you know what a credit score is and how to find it, make sure to keep checking on your credit score monthly and always look for ways to improve your credit score.