The Importance of Your Credit Score

Did you know that your credit score helps determine a great deal more than your qualifications for a loan and the interest rate you pay? For example, insurance companies may use credit scores to set premiums for auto and homeowner’s coverage.  And, when you rent an apartment, landlords may use your credit score to decide if you will be a good renter. Low credit scores can also hurt your chances for landing a good job, as some employers will check a candidate’s credit score to determine responsibility.

Unfortunately, most of us only think about credit scores as they relate to borrowing money.  It is true that credit scores are a financial tool that can determine whether you can get great deals on loans and credit cards, but many people don’t realize the true ramifications of having a bad credit score.  The lifetime cost of higher interest rates from bad credit scores could cost you thousands of dollars throughout your life.

What’s the Score?

Your “credit score” is a three-digit number that is based on the information in your credit report. There are three national credit bureaus (Equifax, Experian and TransUnion) that capture credit activity, update credit information, and store credit histories on most U.S. consumers.  After considering numerous aspects of your credit profile, a mathematical formula is used to determine what your score should be – the higher the better. The leading credit score in the industry is FICO and ranges from a low of 300, up to a high of 850.

Since credit scores have become such an integral part of our financial lives, it pays to keep track of yours and understand how your actions affect your score. The good news is that you can build a great credit score regardless of your age or income.

Here a few tips to help you raise your credit score:

• If you don’t have a credit score, apply for a secured credit card to help start building your credit history.  This gives you a line of credit equal to the amount you deposit with the issuing bank and can help you demonstrate that you can make payments in a timely manner.
• Develop good financial habits like paying your bills on time and not using your full line of available credit – which can have a big impact on your credit score.
• Pay credit balances in full whenever possible, and if you do have to carry a balance from one month to the next, pay it off as quickly as possible. And don’t forget to pay on time, because late payments could reduce your score by 100 points or more.
• Avoid closing accounts or lines of credit as you build your credit. That could hurt your score too.
• Do not co-sign on a loan for someone unless you are prepared to become responsible for that debt and how they repay that debt.  If they default on that loan, you will be held responsible.

Your credit score and underlying history are a vital part of your financial life. Your credit score follows you everywhere and can play a significant role in many major financial decisions throughout your life. As a consumer, you are entitled to receive your credit report annually for free at AnnualCreditReport.com, and you should proactively monitor your credit report for accuracy and to help protect your identity.