Your credit score and you

A credit score is one of the key ways lenders assess your creditworthiness when you apply for a loan or a line of credit. Since borrowing money is one of the stepping stones for many life milestones – such as getting a college degree, buying a house and owning a car – your credit score is something you need to pay attention to.

One way to think of it is as an extension of your financial reputation. By maintaining a good reputation with lenders, you can establish yourself as a trustworthy borrower and customer, unlocking perks and benefits that can reach beyond your loans and into the rest of your financial life.

What is a credit score?

A credit score is a number, spanning from 300 to 850, that indicates how trustworthy you are to lenders and creditors. When you apply for a line of credit, such as a mortgage, an auto loan or a credit card, a lender will look at your credit score to determine how likely you are to pay off the loan and make your payments on time.

The higher your credit score, the more appealing you are to lenders. If your score is on the lower end (669 or lower), lenders may be reluctant to approve you for a loan or credit card.

A good credit score can open many opportunities for you. Not only will you be more likely to qualify for a loan or a credit card, but you can get better interest rates on your loans, have access to higher credit limits and even get better insurance rates.

The most popular credit scoring model used by lenders is the FICO score, which uses a combination of indicators in an individual’s credit history to calculate the score.

There are three bureaus that issue credit scores: Experian, Equifax and TransUnion. Each bureau has its own process for calculating your score based on the information reported to it.

How is your credit score calculated?

For a FICO credit score, there are five key factors that go into calculating your credit score. Each factor is weighted differently, which means that you should pay attention to the ones that can most heavily influence your credit score if you want to improve and maintain it:

• Payment history (35 percent) impacts your score the most heavily. This can include payments on loans, your credit card and payments for utilities and rent.
• Credit utilization (30 percent) is how much you owe in proportion to your lines of credit. If you keep a balance well below your credit card limit, your score will be higher. Borrowers who max out their credit are seen as riskier by lenders.
• Length of credit history (15 percent) gives lenders an idea of how long you’ve been using credit. If you’ve gone for seven years without missing a payment, you’ll be seen as more reliable.
• Credit mix (10 percent) indicates the different kinds of credit accounts you have. Having a mix of revolving credit (credit cards) and installment loans (like a mortgage or student loan) will boost your score more than having only one type of credit.
• New credit (10 percent) tells lenders how many new accounts you’ve opened recently. When you apply for a loan or credit card, lenders will send a hard inquiry on your credit score. Too many inquiries in a short period of time can negatively impact your score.

All of this information is available through your credit report, which is compiled from information sent by lenders and other individuals or organizations you do business with.

It’s important to know that some information – such as whether you’ve declared bankruptcy in the past ten years – can stay on your credit report even after you’ve recovered your credit score. That’s why it’s important to keep an eye on both your score and your credit history.

How your credit score reflects your financial reputation

A credit score is more than just a number – it reflects your financial reputation.

Lenders and creditors are taking a risk when you borrow money from them. If you don’t make your payments, they may lose the money they lent you if you default, settle or declare bankruptcy. To lessen that risk, lenders will want borrowers with a reputation for paying back their loans consistently and on time.

This is why, whenever you apply for a loan or a line of credit, the lender will want to check your credit score.

A high score tells lenders that you have the potential to be a good borrower. It indicates you stay with the commitment of paying off your loans, you don’t regularly max out your credit cards and that you’ve been doing so for a number of years.

Lenders want to have customers with high credit scores, which is why they tend to offer more deals to high-credit applicants – such as better credit card rewards, lower interest rates and a higher chance of being approved.

Your credit score is an important part of your financial foundation. It should be taken seriously, as it can impact several aspects of your life and your financial goals as you borrow, spend and save money. By building a good financial reputation through your credit score, you can save money and open more opportunities for yourself.

How your credit score impacts your life

While the simplest definition of your credit score is that it indicates whether you can borrow money or not, your credit score can impact your life in ways that go beyond loans.

While you might think having a “good enough” credit score to qualify for a loan will be enough, or that you don’t need a good credit score if you’re not applying for a loan or a card, how high your credit score is can affect your finances and your lifestyle.

Some of the things your credit score can impact include:

• How much money you spend on a loan. A better credit score can get you a better interest rate on your loans – which can impact how much you pay toward the loan overall. Where a 700 credit score might get you a 13 personal interest rate on a personal loan, an 850 credit score might qualify you for a 10.5 percent interest rate. For a $200,000 personal loan paid off over five years, that translates to over $1,500 in extra interest if you have a lower score.
• Where you live. Your credit score can affect your living situation in two ways – by your mortgage or what rentals you qualify for. A higher credit score can qualify you for a better interest rate. That can lower your monthly mortgage payment and give you more options for housing. Housing rental agencies will also look at your credit score when reviewing your rental application. The higher your score, the more likely you’ll be able to rent with them.
• The rewards you can get on your credit cards. High score owners can qualify for credit cards with higher limits and more cushy perks, like higher cash-back bonuses, airport lounge access and travel benefits.
• Your vacation plans. If you’re traveling, you’ll need a credit card in order to book a hotel or rent a car. Rental agencies may run a credit check if you pay with a debit card. Having a good-quality travel card can net you travel bonuses and discounts.
• Your insurance rates. If you have a higher credit score, you can get lower premiums on your car and home insurance. Drivers with poor credit scores can pay twice as much as drivers with excellent scores.
• Your utilities. If you have a low or no credit score at all, you may be required to pay a deposit before you can open an account for internet, water, electricity and more.
• Your job. Some employers will screen job applicants’ credit history when they evaluate a potential employee. If your score is too low, you may not qualify for a job.
• How much you’re able to save. Paying extra on insurance and interest and missing out on card rewards can curb your ability to save for the future – which can translate into a thinner emergency fund, missed retirement savings and more.

Keeping the bare minimum credit score to qualify for a mortgage or a credit card can hurt you in the long run. Instead, focusing on boosting your credit score and keeping it in the high range can help you save money and reap financial benefits over time.

Why your credit score always matters

Even if you own your home, are retired or don’t plan on taking out any loans in the future, your credit score is still an important part of your life – no matter what your age or finances look like.

As mentioned before, your credit score can impact your life beyond borrowing money. Having a good credit score – even if it’s “just in case” – can help you save money and keep your options open.

For example, if you own a car, you’re required to have car insurance. Having a good credit score can save you money on premiums, which can translate to thousands of dollars over the years.

If you ever need to cash in on your home’s equity, whether it’s to pay for retirement, cover a home renovation or simply access your home’s value without selling, your lender will want to check your credit score before they offer you a home equity loan or line of credit. Having a lower score or no credit score at all can lengthen the approval process, incur additional fees, land you with a higher interest rate or prevent you from getting approved.

Even if you don’t plan on borrowing money yourself, if you want to co-sign on a loan for someone – for example, for a child taking out student loans – the lender will want to see you have a good credit score.

Your credit score also comes into play if you plan on entering a retirement community or a nursing home in the future, as many will run a credit check when you send in an application.

Finally, if you don’t maintain your credit score, you could be missing out on credit card rewards such as cash-back bonuses, travel perks and more, which can save you money in a variety of categories.

Building and maintaining a high credit score can offer you several rewards and perks, even if you believe your days of borrowing are over.

Boosting your credit score the right way

No matter where you are in your financial journey, boosting your credit score and cleaning up your credit report should be at the top of your list of priorities.

Boosting your credit score and keeping it high can take time. One way to start is by taking out a secured credit card with a low limit and paying it off each month or by becoming an authorized user on someone else’s credit card.

As you build your credit score over time, more options for loans and credit cards will become available to you, and you can start enjoying the benefits of having a high score.

If you’re trying to recover your credit score after seeing it fall – for example, if you missed several payments, had debt go into collections or declared bankruptcy – building back your score may take longer and be more difficult.

If you’re looking to clean up your credit report and get a fresh start on rebuilding your score, you might want to consider working with a credit repair company.

A credit repair company can help you boost your score by cleaning up your credit report by disputing inaccurate claims in your credit history.

For example, Lexington Law has a team of legal professionals experienced in the dispute process, advocating on your behalf using consumer protection laws and working with all three credit bureaus to update your report.

The bottom line

A credit score is one of the primary ways lenders evaluate potential borrowers when approving them for a loan or line of credit. However, your credit score can impact your finances in ways that go beyond borrowing money, which is why it’s important to pay attention to it.

A high credit score can net you rewards, perks and ease of access to credit – all benefits of having a good financial reputation. By focusing on boosting your score by making your payments on time, keeping a mix of credit and repairing your credit history, you can enjoy the benefits and opportunities of a high score in no time.