Other than your phone number and smartphone passcode, your credit score is the most important series of digits in your life. It affects your life on a daily basis – it can determine what you can buy, how much interest you’ll pay and whether financial-services companies want to work with you.
Think of it as your risk factor. Lenders look at how risky you are in terms of borrowing money. And the lower your score, the greater the risk.
In other words, credit scores determine what kind of house you can buy or rent, what kind of automobile you’ll ride in and whether you can enjoy life in the way you want to day to day. If you have a poor credit score, you’re going to have to pay much more for these life necessities – and that could add up to hundreds of dollars in lost savings. A good credit score really is that important.
Lenders – including banks, mortgage companies, credit-card issuers and car dealerships – all use credit scores for nearly every major purchase you’ll make. They study your score to determine whether you’ll get credit and the terms they’ll offer you, such as your interest rate or the size of the down payment they’ll require you to make.
Credit scores range from 300 to 850. Most people fall into the range of 600 to 750. But to lenders, a “good” credit score is anything from 700 and above; you’ll get better than average interest rates and the like. If your score is 800 or higher, you’ll fall into the “excellent” range and you’ll have the best options when it comes to borrowing money.
For example, if you applied for a FHA mortgage, you’ll have to make a 10 percent down payment if your credit score is under 580. However, people with a credit score of 580 or higher will require a down payment of only 3.5 percent. Grim but true.
Factors that affect your credit score vary depending on the lender. But some common ones include:
- Your payment history. If you’ve been late on a regular basis, your credit score is going to feel the pain. This includes payment on your home, credit cards and others.
- How much credit you use. If you’re making small monthly payments on a credit card with a huge credit limit, you’re going to be seen as more risky. Your credit score will drop as a result. Here’s a generic guideline: If your credit line is $1,000, you should charge no more than $300 monthly. That will keep your utilization rate at 30 percent or below, which is what most financial experts recommend.
- How many credit accounts you have. Sure, opening a credit card at that department store seemed like a good idea at the time. But your credit score may have taken a hit because now you’ve got too many open accounts. Also, if all of your accounts are relatively new, your credit score may fall because of it. You want to have a few older accounts with a good payment history open at all times.
- Public records. Your bankruptcy will stay on your record for a decade, and that will impact your credit score. This is another reason why you need to have everything else in perfect shape to offset this issue. Tax liens or civil judgments from court also lower your score.
What doesn’t affect your credit score? Your age, where you live or your race, color, religion, national origin, sex or marital status. U.S. law forbids financial institutions from using any of these facts when establishing their credit-scoring formulas. Any inquiries made by a potential employer also are not considered in determining your credit score.
Yes, companies can look at your credit score when deciding if you should get a job offer. Recently, human-resource departments have started to look at credit scores when determining whether to hire someone. Your credit activity says something about your responsibility levels, how seriously you take being an adult and what kind of worker you’re likely to be. This is a serious issue that needs to be addressed if you want to land the job of your dreams.
Bottom line: Your credit score is a key indicator of your financial health. Treat it with respect, and you’ll get respect.
By Charissa Potts,
Attorney at Freedom Law, PC