As a long time renter who relies on public transit, applying for a major loan like a mortgage, auto loan, or otherwise is not in my forseeable future. But that doesn’t mean I can afford to ignore my credit score.
Not only are credit scores a deciding factor in being approved for or denied financing, they can also be used as a measure of trustworthiness in seemingly unrelated aspects of your life. Everyone from insurance companies to landlords to potential employers may be using your credit score to assess your responsibility and reliability.
You’ve seen the barrage of “free credit report” commercials on television, but do you really know what a credit score is? Your credit score, or your FICO score (in the majority of cases), is a measure of how well you borrow money. In other words, it’s a number that tells lenders how likely you are to pay back a loan.
Your score is calculated from the information reported on your credit reports from the three major credit bureaus- Experian, Equifax, and TransUnion. The following are the five categories and their respective importance in determining your FICO score.
35% Payment History. Have you paid past credit accounts on time? This is the most important part of your credit score and is determined by repayment of past debt.
30% Amounts Owed. What percentage of your available credit is being used? The less you owe, the better.
15% Length of Credit History. How long have your credit accounts been established? The more credit history, the better.
10% New Credit. Are you opening several new credit accounts in a short period of time? Opening a bunch of new accounts in a short period of time can damage your score.
10% Types of Credit Used. Do you have a mix of credit cards, retail accounts, loans, etc? It’s good to have a variety of credit.
Your FICO Score can range from 350-850, the higher the better.
If you have no credit history, you may be a zero, which means you’ll probably have trouble being approved for any kind of financing, even a basic credit card.
Fun (or not so fun) fact: Even if you make six figures and have significant savings in the bank, no credit history still makes you a risk to lenders by traditional credit reporting standards.
Your credit score is important because it will determine whether or not you are approved for major loans. It will also determine your interest rate on those loans, which can save or cost you thousands in the long run.
As I mentioned before, your credit score can also serve as a measure of reliability for landlords, employers, and insurance companies.
Basically, it factors into just about every major aspect of your life- employment, housing, transportation, etc.
To improve your credit score, you need to create a history of financial stability and responsible borrowing.
How’s your credit? What are you doing to improve it?