Why Does Your Credit Score Matter?

Your credit score can do much more for you than allowing you to get a more favorable mortgage loan. Shopping around for car insurance, looking to rent an apartment or house, or signing up for a new cell phone plan? If you answered yes to any of the above, chances are a good credit score will make your life easier. Oh, and the money your score will save you isn’t bad either. 

If you’re looking to get a mortgage your credit score determines a lot more than you think. Because the credit score reflects a borrower’s history of paying bills on time and responsible use of credit, a borrower with a higher score has a better chance of consistently paying off their mortgage. Some lenders base loan interest rate on your credit score, giving higher rates to less creditworthy applicants. This means if you have been using your credit wisely, you’re likely to receive a lower interest rate than a less creditworthy counterpart.

How Credit Scores are Calculated

To understand your credit score, you need to know how it’s calculated. There are a few areas that control your credit score:

• Payment history – accounts for 35% of your score. Do you pay your bills on time? Has a collection agency tracked you down? Have you declared bankruptcy?
• Amount of Debt – Another 30% of your score comes from the amount of debt. Have you maxed out your credit cards? A good rule of thumb is to use less than half of your available credit (a quarter of your available credit is ideal).
• Length of Credit History – The longer your credit history, the better the “mix” of credit (i.e. cards, loans) and the fewer examples of “new” credit, the higher your score will be.

Think of the balance of your credit score coming from three different buckets — the amount of time you’ve had credit, the different types of credit in your report and any new credit.

Start with One Credit Card

Be careful not to make the mistake of opening too many credit cards too soon. If you’re a first-time credit card user, it’s okay to have just one card. The more credit you have, the more you will end up using and the harder it will be to keep up with your balances and payments. Too many inquiries into your credit and too many new credit cards can negatively affect your credit score.

Pay Bills On Time

Make sure you are paying your monthly bill on time or even a little early! Past due payments can stay on your credit reports for over seven years. Your credit score also suffers when you run up big credit card balances and don’t pay them off. Paying off these balances each month shows that you can pay bills, something creditors and lenders want to see. Since a large part of your credit score is based on the timeliness of your payments, paying your balances on time improves your credit.

Monitor Your Credit

Check your credit on a regular basis. If you notice it’s going down, do some research. If it is going up, great work – try to maintain or grow that score. FICO^®, which is one credit-scoring company, says scores between 670 and 739 qualify as good. The longer you have had credit, the better it is for your credit score. Leave your oldest accounts open since they help increase your credit age and build good credit.