Your credit score isn’t something you think about every day. Unless, of course, you’re getting ready to make a major purchase, like a new car or a home. That’s when you fully comprehend the importance of a good credit score.
Those expensive buys aren’t the only reasons you need to have one. Without it, you’ll pay hundreds of thousands of dollars more in interest on many things throughout your life. Solid credit scores budget lower interest rates on secured and unsecured debt.
That’s a lot riding on a single number. So you should understand what it is, how it’s calculated, and how a good score can make your life easier. Here are four things to know about your credit score.
Good credit must be built and you’re the only one who can do it. The sooner you can pour a solid foundation, the sooner you’ll be on your way. But how do you build one, if you don’t have a credit score yet, or if it’s in the basement?
One great way is to use a credit builder card. It’s a secured credit card with a limit determined by the amount of money you have deposited in the account. Put in $1,000, and that’s your credit limit.
Whip out your credit builder card to make small purchases and pay the full balance every month. Because you’re using credit, you’ll have a score. Because you’re using it wisely, you’ll be building a respectable one.
You can also apply for a credit-builder loan. A lender puts a small loan amount in a special account that starts earning interest. You make monthly payments until you have repaid the value of the loan and then you can use it.
In either case, your timely payments are reported to major credit agencies. Establishing and raising a credit score takes a little work. But if you build it, good things will come.
Credit scores aren’t based on one thing, but five factors are calculated to arrive at a single score. Know what they are, and you’ll know what to pay attention to as you build or raise a score.
Payment history is a whopping 35% of your score. This is where making payments on time comes in. Miss a payment or make a late payment and 35% of your score calculus will get dinged.
Coming in a close second, at 30%, is the amount of money you owe or “credit utilization.” Using 30% or less of all the credit that has been extended to you will raise your score. Using more than that shows that you’re overextended, which lowers your score and makes you a bigger loan risk.
Length of your credit history (15%), new credit (10%), and credit mix (10%) round out your score. A long history with a lender is a plus, while opening too many new accounts at once is a negative. A good mix of credit cards, installment loans, and mortgages will improve your score.
All five parts need time and attention, especially the two that comprise 65% of your score. Keep them greased and your credit score will hum like a well-oiled machine.
You might vow to spend the rest of your life with someone through richer and poorer. But your credit score remains yours and yours only, until death do you part.
Each spouse’s credit score comes into play when applying for loans like a mortgage to buy a home. When one spouse has a poor score, it could derail your desire for home ownership. Be prepared to make some major decisions about that major purchase.
The spouse with the good score could apply for the mortgage and leave the other one off the paperwork. However, the solid-score spouse’s income (and debt-to-income ratio) would have to support the loan on its own. Using only one income could severely lower the size of mortgage you could qualify for.
The fact is that one spouse’s low credit score can cost both of you thousands over the lifetime of a mortgage. It may be well worth the time and effort it takes to raise the low score before applying jointly. Doing so may carry you both across the threshold of owning your own house.
A credit report is the history of your credit. Your credit score is the numerical snapshot of that history. And history will only repeat itself if you let it.
Your credit history will reflect poor choices, like defaulting on the credit card you got while in college. However, it’s not like a felony conviction that stays on your criminal record forever. There are statutes of limitations on financial offenses.
Most of the time, the debt you defaulted on will remain on your credit report for seven years. During that time, it will lower your credit score. But once it is removed from your report, it will no longer haunt you.
Even bankruptcies remain on your report for only so long. A Chapter 7 bankruptcy will be there for 10 years, and Chapter 13 can affect you for up to seven. You will then have an opportunity to bring your score back up again.
Your credit score will have to do hard time for a while if it’s low because you made some mistakes. The good news is that it’s not a life sentence. In the meantime, work on reforming your financial habits so your score can rise when set free.
Most people are going to need credit for something during their lifetime. It could be for something major, like buying a house, or for something minor, like a payday loan. Some jobs even run credit checks before they hire you.
Whatever the reason, it’s generally true that the higher your credit score, the lower your interest rate. That’s because to a lender, you look like a risk worth taking. And that’s the most important thing you should know about your credit score.