Your credit score. Yawnnnnnn. Pretty boring right? It’s some 3-digit number, most of us can’t even understand, and it’s calculated in some black box.
How important is it anyway? As long as I get approved, it shouldn’t matter that much, right?
The reality is your credit score is critical when it comes to lending. It’s your personal borrowing report card. And the difference between an A+ or C- can save you a lot of money when applying for a loan or mortgage.
So how important is your reputation when it comes to credit? And do you really know the ins and outs of what makes a good credit score?
It’s easy to take it for granted. Many people don’t even think about it!
To be honest, it’s so important that I’m going to put two posts against it this week. In them, I’ll break it down for you:
- How your credit score is calculated
- Why you should care about your credit score
- How you can improve your credit score
- And bust some credit score myths out there (Part 2 later this week)
Let’s start with some of the basics…
What is a credit score? And how’s it calculated?
Your credit score is a reflection of how well you manage your financial debts. If you’ve borrowed money “officially” from someone in the past, you likely have some kind credit history.
The details of your credit score are logged by independent “credit bureaus.” There are three big ones in North America – Transunion, Equifax, and Experian (US only). These companies help to give an independent view of borrowers and lenders. They also help to create some form of consistency in building credit scores.
As your borrowing transactions occur these companies track them and assign you a credit score. Generally, there’s different weighting given to different activities.
Overall, the higher the score, the more “qualified” you are in the eyes of lenders. Here’s a breakout showing what typically classifies as a good credit score:
So what goes into making the score? It’d be nice to have a precise breakdown, but that’s just not possible.
Companies have worked hard to build their models, and prefer to keep it private. That being said, here’s a breakdown of what they typically look at:
Now, why your credit score matters…
OK – so this is nice in theory, but why should someone care? What makes a credit score so important anyway? Here are a couple of things you should think about…
1) Your credit score can save you money
Lenders are more likely to give you more money and at a cheaper rate, if you have good credit. They’re more willing to compete for your business because they know you can shop around for it.
Below is an example from FICO’s Loan Savings Calculator that shows how a better credit score translates into more money for you:
|Credit Score||Interest Rate||Total Interest Paid||Difference Paid|
|5-Year Auto Loan||A) 720||3.67%||$2,886|
To layer on top of that, Credit.com spells out the impact that good credit can have over your lifetime. Play around with it for yourself. I found one instance of someone in Florida being able to save $51,000 just by having a better credit score… and all it takes is paying your bills on time and keeping excessive borrowing in check.
2) Your credit score can give you access to premium credit cards and rewards programs
Those who have good credit are also more likely to get approved for premium credit cards. These products are great! They often give you loyalty rewards just for using them.
Typically these cards are only reserved for top-end customers. They want to know you’ll use it often, yet not jeopardize the balance you accumulate. They wouldn’t want you racking up points at a cost to them, only to hunt you down for collections later. There’d be nothing in it for them then.
These points can really add up! I put everything I can on my credit card (note: it’s never wrong if you always pay down the balance). After two years of paying day-to-day expenses, my wife and I were able to afford flights to Europe. Not bad for zero extra work!
3) Your credit score could help land you a nicer place to stay
Landlords know the importance of having good tenants. And one of the most important things a possible tenant can have is good credit. It helps provide confidence that rent will be paid on time.
More professional landlords will make having your credit score mandatory when you apply. You can bet that the most sought-after places will have a line-up of applicants – having a good credit score will help you shine compared to the others in the pile.
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How do you know what your score is?
It’s helpful to understand where you’re starting from. By getting your score, not only can you see how lenders perceive you, but it also gives you a chance to see if there are any errors in there!
Where can you find your score? You can buy a report from the credit bureau. Also, some banks now have their own apps to help you access it, along with some financial advice to improve your score (and using them typically doesn’t affect your score).
If you’re looking into the nitty gritty of your credit history, you can actually get that for free annually from each of the national bureaus. In fact, fact, AnnualCreditReport.com was created by the credit bureaus in the US as a one-stop-shop for providing your annual credit reports. In Canada, you can get it from TransUnion here or from Equifax here (under Credit Report Assistance). Access to your own score like this won’t affect your credit rating.
You can improve your credit score with these steps!
Your credit score is fluid, meaning it can change (hopefully for the better!). Granted not overnight, but there are a lot of small steps you can do to help improve it.
Want an inside look at the whole list? Click the image below and subscribe to receive them as well as other weekly tips from me! Otherwise you can get a summary of the top ideas below…
- If you’re not already, get those payments in on time – Late payments and collections have a big impact on your credit score. Make sure you do your best hold up your end of the bargain when you’re borrowing money.
- Automate your payments to be sure you don’t miss one – One of my favorite life hacks is to automate everything you can… that includes bill payments. Automate all the bills to your credit card, and then have your credit card paid off in full as well. A lot of people don’t realize they can do this, but it can save you a lot of time and headache. There’s a dual benefit! You maximize rewards you may get from your credit card, and you’ll also never forget to pay a bill!
- Watch how much debt you take on and use – As I mentioned, credit bureaus check how much debt you take on and how much of it you use. Try to keep both to a minimum.
- Take it slow – Your credit history won’t change overnight. Remember, it’s trying to build a trend on how creditworthy you are. That means you need to give it enough time for a new positive direction to form. Don’t be discouraged if your score doesn’t change right away… consistency here is more important. Prove that you’re a good borrower, and over time you’ll be rewarded.
Think it through
- Do you have troubles meeting your current payment obligations? What’s getting in the way?
- How do you keep track of all your finances? Does this allow you to pay your bills on time?
- What’s the best thing you can do to build better borrowing habits? (Share yours with us below!)
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