How Your Credit Score Impacts Your Financial Future

Most people don’t know their credit score until they try to buy a house, get a loan for a new business, or make an important purchase. Credit scores are usually three-digit numbers that lenders use when deciding whether to grant you a loan, credit card, or other credit line, as well as the rate of interest. The credit score gives the lender a snapshot of the risk you pose to them at the time you apply for credit.

Each person has a credit score. Both you and your spouse have a credit score if you’re married. If you co-sign a loan with someone, then both of your scores will be examined. If you look riskier to the lender, you’ll be less likely to receive credit, or if you do, you’ll pay more for it. You will be charged more for borrowing money.

Scores can range between 300 and 850. The higher your credit score is, the more favorable the terms you will receive when it comes to locking an interest rate.

You may be wondering, “Where am I?” To answer this question, you can request your credit score (for which there is a charge) or free credit report from (877) 322-8228 or www.annualcreditreport.com.

Fair Isaac Corporation developed the most widely known credit scoring system, which is called FICO. Equifax (r), TransUnion (r), and Experian (r) all use the FICO scoring system for their proprietary systems. Each scoring system has a slightly different model. Therefore, the scores you receive from the three credit bureaus will be somewhat different. This is because other lenders and businesses may report their information to credit reporting agencies differently, and the agencies might present the information differently.

Due to the fact that different lenders use different criteria when making loans, your credit score will depend on which lender your credit bureau uses.

How your credit score affects you

Suppose you are looking to borrow $200,000. You can do so with a 30-year fixed-rate mortgage. A lender may charge you 3.307 percent interest if your credit score falls in the top category. 1 This would mean a monthly payment of $877. However, if your credit score falls in the lower range of 620-639, for example, you might be charged 4.869 percent, which would result in $1,061 in monthly payments. The lower credit score, although still respectable, would result in a $184 monthly increase for your mortgage. You would pay $66,343 extra throughout the loan if you did not have the highest credit score. Imagine what you could achieve with an extra $184 per month.

How to Determine Your Credit Score

How do credit bureaus calculate your credit score, then? Fair Isaac developed a unique credit scoring system that takes into consideration five factors for each of the bureaus:

ComponentComponent Weight

Payment History 35%

What you owe 30%

Credit history length 15%

Types of Credit 10%

New Credit (Inquiries) 10%

What Hurts and Helps Your Credit Score

What each component tells us about you

• Payment history reveals your record of repaying your debts on schedule. This component includes your credit card payments, retail accounts (such as auto or student loans), finance company accounts, and mortgages. The public records and reports that detail items such as bankruptcy, foreclosures or suits, judgments, liens and garnishments, and wage attachments are also considered. Your score is improved if you have a history of timely payments, at least up to the minimum amount due. Your score is affected by late or missed payments.
• Credit Utilization shows how much debt you have and helps determine if you’re able to pay it back. Your credit score can be affected if you have high credit card balances or if your cards are almost “maxed-out.” As a rule, you should not exceed 30% of your credit limit. The credit score is boosted by paying off an installment loan. If you borrowed $20,000 for a car and paid $5,000 back on time, you have demonstrated responsible debt management. This will positively affect your credit score.
• Length Of Credit History is the length of time you have used and had credit. Your score will improve the longer you have been managing credit responsibly. This is because lenders can see more of your repayment patterns. You will be able to look good in this category if you have always paid on time.
• Types of Credit refer to the “mix” you have access to, such as credit cards, retail accounts, installment loans, and finance company accounts. It is not necessary to have all types of accounts. This factor instead considers your credit history and how you use it. If you use a credit card for a boat purchase, this could affect your score.
• New credit (Inquiries indicate that you are in debt or about to get into more debt. It can be more risky to open many credit accounts within a short period, especially if you do not have an established credit history. Every time you apply for new credit, it counts as a hard hit or inquiry. There may be several inquiries when you shop around for a car or mortgage. As you’re only looking for one loan, these inquiries in 14 days will count as just one hard hit. Multiple credit card applications in a short period will be counted as hard hits and could lower your score. Soft hits, such as your request to receive your credit report or requests for lenders to offer you “preapproved” credit, and those from your employer will not affect your score.

You can save money with good credit.

Credit scores are raised by good credit management, lowering your borrowing costs. Smart financial decisions include living within your means and paying off all debts, including credit card minimum payments, on time and every time. These actions can improve your credit rating, lower the interest rate you pay on your loans, and give you more money to invest and save.