The lifetime journey of your credit score

Your credit score isn’t set in stone. As you borrow money, open and close new lines of credit, make payments and lengthen your credit history, your credit score will reflect your financial habits throughout your lifetime.

Conversely, your credit score will impact your financial life in turn – from big life events like buying a house, to how much you spend on lending costs, to how your finances play out in retirement and beyond.

Staying on top of your credit score throughout its (and your) lifetime can come with big benefits. Even with the dips and bumps that can come with life, boosting your credit score is ultimately a long game – one that isn’t too late to start.

Your credit score in the beginning

Your credit score is based on your credit history, which includes the loans you take out in your name, the credit cards you use and payments you make on things like rent and utilities.

The three credit bureaus – Equifax, Experian and TransUnion – use various factors in your credit history, including your payment history, the age of your credit and the mix of credit lines you take out to calculate your score.

Of course, nobody is born taking out a loan or with a credit card. Your credit history begins only when you start taking out lines of credit, which is why many young people entering adulthood will have no credit history or score to their name.

While not having a credit score isn’t the same as having a low score, in the eyes of lenders, it makes you a risky borrower. Lenders don’t know if you’ll reliably make payments or default on your loansIf you apply for a loan or credit card with no credit history, you’re not likely to get approved.

When starting your credit history, you have a few options:

• Becoming an authorized user of a credit card can help you build your credit history without having to qualify for a credit card directly. An existing credit card holder can make you an authorized user. You’ll have access to your own card and balance, which is paid for by the primary card holder.
• Taking out a secured credit card involves putting a deposit – typically $100 – on a credit card that the credit card company can reclaim if you miss a payment. Paying off your balance in full each month will keep your deposit safe and help build your credit history.
• Using a co-signer on a loan means you can get approved for loans you otherwise wouldn’t, allowing you to build your credit history. The co-signer will need a good credit score and is obligated to make payments if you default or are otherwise unable to pay. If you make your payments on time, however, then you’ll help raise your score.
• Paying off federal student loans will also kick-start your credit history if you’re a student borrower. Non-PLUS federal loans don’t require a credit check when you take them out. While you’re not required to pay them back, making payments as low as $20 each month can kick-start your history and lower the principal you’re charged interest on.

The important thing to remember with these options is to stay on top of your payments and credit limits. Because the length of your credit history, which is a key factor in calculating your score, is already on the low end, making sure that your payments are on time and your utilization rate is important.

Your ability to borrow and take advantage of perks like credit card rewards and competitive interest rates will be limited at first. If you stick to your payments and are careful with how you handle your credit, you can start building your credit and working your way to a good score.

Cards, debt and credit checks

Once you’ve started building your credit history, your credit score will slowly evolve. Opening more accounts over time will improve your credit mix. Keeping your utilization ratio low and making payments on time will continue to build your score. As time goes on, the length of your credit history will slowly boost your score.

As your credit score improves, so will the opportunities available to you. You’ll get better interest rate offers when you apply for a loan. You’ll also qualify for more credit cards, often with competitive perks and rewards.

Your credit score can even impact you beyond the landscape of lending. Landlords will often run a credit check when you apply for an apartment or rental housing, with a good score boosting your chances of getting approved for a lease. Insurance companies will give you a lower premium on car insurance, and some employers will include your credit history as part of their criteria for job candidates.

As you open more lines of credit, something important to consider is the impact of credit checks, also known as inquiries.

Every time you apply for a card or a loan, the lender will run a credit check on your account in order to see your score and in-depth credit history. There are two kinds of credit inquiries your lender can conduct – hard and soft checks.

Soft credit checks are typically used in the preapproval process and don’t affect your credit score directly. A hard inquiry, however, will drop your score by a few points.

Too many inquiries in too short of a time can quickly add up and significantly drop your credit score, which is why you should be careful about applying for loans and cards.

During the first few years of having a credit score, every point counts while you build up positive activity, diversify your credit mix and lengthen the age of your accounts.

It’s important to keep an eye on your score and space out your loan and credit applications during this time so hard inquiries don’t pull you down.

This way, you can build your score sustainably and set yourself up for success later down the line when you need your credit score for larger loans and big milestones.

Your first big loan

It’s been a few years since you opened your first credit account. You’ve been paying off your balances and making your payments on time, watching your utilization ratio and being careful with your inquiries.

Slowly but surely, your credit score has risen – and now, you’re starting to think about taking out your first big loan.

For many people, the first big loan they take out – besides student loans, which are either federally backed or generally require a co-signer – will be a mortgage or an auto loan.

Your credit score will play a significant role when you apply for these loans. Not only will you need a good score to get approved, but how high your credit score is will impact the terms you’ll be offered for your loan. Building your credit score before you take out a mortgage or a loan is as important as building up a good down payment.

For a mortgage, you’ll generally need a credit score of 620 to get approved. While some types of mortgages, such as a Federal Housing Administration (FHA) loan, can extend credit to those with lower credit scores, having a higher credit score will get you better rates. This can save you interest and lower your monthly mortgage payment in the long run.

The same goes for auto loans. While the minimum score needed will depend on the lender, a higher credit score will get you a better interest rate.

For example, the average APR on an auto loan for a borrower with a score in the 640 to 659 range is 9.60 percent. On a $20,000 five-year car loan, 9.60 percent is a $421 monthly payment and $5,261 in total interest. A credit score of 780 and above, on the other hand, will get you a 5.64 percent APR, which is a $383 monthly payment and $2,999 in interest – saving you $2,262 in total interest paid.

When and if you’re approved for an auto loan or a mortgage, your credit score will continue to evolve. The hard inquiry the lenders make will cause a small dip, and you might also see a decrease as you assume more debt.

However, if you make your payments on time, avoid making too many inquiries and watch your utilization ratio, your credit score will recover and continue to grow. You’ll build positive activity and diversify your credit mix with your new loan.

Financial snags

Life doesn’t always play out the way we mean it to. Losing your job, facing a financial emergency or otherwise hitting a monetary roadblock can lead to a dip in your credit score in several ways.

If you’re faced with an emergency expense, you may max out your credit cards in order to pay for it. This can increase your utilization ratio, which will cause a dip in your credit score.

A rough month can cause you to miss a payment on your mortgage or your credit card. A missed payment will negatively impact your score and stay on your credit history for up to seven years if you don’t catch it in time. Each month you miss a payment, your credit will continue to take a hit.

If you miss several payments on your balances, you may default on your debts. If you default on your mortgage or auto loan, the assets you secured your debt with – for example, your house or car – will be repossessed and sold to make good on the remaining balance.

If the loan is unsecured – such as credit card debt – your debt can be sold to a third-party collections agency, who will then attempt to recover payments from you.

If you’re totally unable to pay off your debt, you may even have to file for bankruptcy in court. You may have your property repossessed or have to enter a modified repayment plan to pay off the remaining balance.

Default, foreclosure, bankruptcy and having debt in collections can seriously damage your credit score. These items can stay on your credit report for several years, making it difficult to get approved for a loan or a credit card in the future.

While you can recover your credit score after issues like these, it will take time to rebuild and for negative items to come off of your history. If you find yourself facing difficulties making your loan payments, be proactive in talking to your lender and seeking assistance in modifying your payments before you miss a bill.

Refinancing and more loans

As the years go by, you’ve become used to making payments and managing your debts and lines of credit. With a few decades of having a credit history under your belt, even though you may have encountered some snags, you’re still slowly building your score up and making sure the positives on your report outweigh the negatives.

Your credit score will continue to play an important role in your financial life, even after you’ve secured a mortgage and have a good credit mix. As your lifestyle changes, so will your needs evolve as you rely on loans and lines of credit.

If you own your home, you may want to refinance your mortgage for a better rate or cash in on some of your equity. When you do so, your lender will run a credit inquiry and will offer you a rate according to how your score is. Keeping your score up will make the approval process easier and get you a more competitive interest rate.

Other needs for borrowing may also arise. You may need to take out a medical loan to pay for expenses for yourself or a member of your family. You may need to purchase a second car or take out a loan to cover a home renovation or a child’s tuition.

You may also find yourself using your good credit to support others. If you have a child who is attending college, you may want to be able to co-sign on their student loans or an apartment lease. If you have an older parent entering a retirement or nursing home, you may undergo a credit check if you’re paying for their stay.

As always, your credit score will continue to be impacted by credit checks, your utilization ratio and the payments you make on your accounts. While old negative marks on your report will eventually come off your credit report, it’s important to keep building a positive history to keep your score up for your future credit needs.

Retirement

As you approach retirement, you might think that your need for a credit score is coming to an end. You may have paid off your house and car when you’re ready to retire. With your retirement fund and Social Security providing a consistent income, you may not think you’ll need to borrow money or rely on a credit card.

However, you shouldn’t neglect your credit score as you approach your retirement years. Even without the need for a mortgage or a car loan, it’s more important than you think.

If you plan on traveling during your golden years, you’ll need – and likely want – a credit card to book a hotel room or rent a car. Having access to credit cards can also mean you get discounts and bonuses on your day-to-day purchases, which can save you money and unlock perks you wouldn’t otherwise have access to.

Even if you own your home, you’ll still want to maintain your credit score in case you decide to take out a home equity loan or a reverse mortgage. Both can supplement your retirement income and allow you to stay in your home while still accessing your equity.

Finally, if you decide to move into a retirement, nursing or assisted-care facility and are paying for it yourself, you’ll have a credit check run on your history. Maintaining a good history and score will allow you to sign a lease without needing a co-signer.

While you may not need to borrow money like you did in your previous years, keeping your credit score in good shape in retirement can act as a fallback for your finances. It keeps your options open for when your plans change and as your retirement income needs evolve as you get older.

Cleaning up your credit for a better future

Throughout the lifetime journey of your credit score, your credit report will be a record of your credit-related activity – good, bad and everything in between.

Keeping your credit report clean is an integral part of keeping your score boosted. A high credit score can help your finances throughout your lifetime, including with getting you better interest rates, unlocking more lending and credit opportunities and getting you exclusive perks and rewards for being a good borrower.

Here are a few of the ways you can boost your score, no matter where you are in your credit’s lifetime.

Positive activity

You can’t undo a missing payment or a debt in collections from being recorded on your report. However, you can contribute positive activity – such as making payments on time, paying off debts and keeping your credit balances low – that can outweigh the negative marks on your report.

Positive activity has an advantage on your credit report. As the debt or credit account stays open, your activity will remain on your report indefinitely. Even after you close the account, the creditor can leave the activity on the report for a number of years.

If you’re starting from scratch after paying off your debts or have had to close several lines of credit, you can take advantage of credit-building products. These are designed to help you build your score through positive activity reports, such as credit builder and small-dollar loans or secured credit cards.

By continuing to build up positive activity, you can slowly boost your score even in the wake of bankruptcy or a missed payment.

Credit activity disputes

Something else to consider is disputing false or inaccurate claims on your report.

Throughout your life, your credit report can become prone to inaccuracies. Whether it’s a falsely recorded late payment; an old credit line that you closed but stays on your report; wrong names, dates and addresses on previous entries or fraudulent lines you didn’t approve of, false items on your credit report can do serious damage to your score.

Disputing these false claims on your report can help boost your credit rating. However, combing through your credit report, finding out if a claim is accurate or not and disputing each one with a credit bureau can be a time-consuming and confusing process.

This is where credit repair and credit dispute companies come in. A dispute firm like Lexington Law employs expert lawyers and paralegals who can track down false claims. Giving attention to all three credit bureaus versus just one or two gives you the best chance to quickly amend any errors.

Even an inaccuracy as small as a wrong address or phone number on an entry can be removed or corrected on your report. Working with a credit attorney can also help you fight to clear your name and your credit after a case of identity theft.

If you want to go through the credit dispute process, consider doing it with an experienced law firm like Lexington Law, which can offer legal expertise and institutional backing to resolve disputes quickly and efficiently.

The bottom line

Your credit score will impact the financial decisions you make throughout your lifetime, from your first credit card to your mortgage to how your retirement can play out. As you build your history and take out new loans and lines of credit, your score will continue to evolve – which is why it’s important to pay attention to it and understand that building credit is ultimately a long game.

It can be natural to hit bumps in the road on your credit journey, which is why knowing when and how to boost your score can be helpful. Building up positive activity, monitoring your credit report and disputing false claims with a trusted credit repair firm can help set up your score to serve you for a lifetime.