Few three-digit numbers carry as much weight as your credit score. Generally ranging from 300 (the lowest possible score) to 850 (the best you can get), your credit score is an indicator of your financial history and how well you borrow smartly. Lenders, employers, landlords, insurance providers, and a lot more use your score to qualify you for loans, homes, insurance coverage, and employment. Here's why your credit score matters, how it's calculated, and how you can build your score over time.
How Credit Scores are Calculated
Experian, TransUnion, and Equifax are the three major credit bureaus in the U.S. Each one collects and shares information about your credit usage with potential lenders and financial institutions. Most lenders use this information along with industry scoring models to calculate your creditworthiness and your overall score. These include:
• The age of your credit. How long have you had your oldest credit card? When was your first loan? An older credit history generally boosts your score.
• The timeliness of your payments. Are you paying all of your monthly bills on time? Chronic late payments, particularly loan and credit card payments, can drastically reduce your score.
• The diversity of your credit. Lenders want to see that you have and have had several kinds of open credit.
• The trajectory of your debt. Are you accumulating new debt each month or slowly working toward paying down every dollar you owe?
• Your credit card usage. Financial experts recommend having several open credit cards to help boost your credit score, but this only works if you actually use the cards and pay off your bills each month. It doesn't help much to have the cards sitting in your wallet.
How Credit Scores Affect Real Life
Your credit score serves as a measure of your financial health to anybody or any company with something to offer. Here are a few ways your credit score can affect your day-to-day life:
• Loan eligibility. This is easily the most common use for your credit score. Lenders check your score to determine if you qualify for a loan.
• The larger the loan, the stricter the requirements. A low credit score can hold you back from buying a house, a car, or getting a personal loan.
• Interest rates on loans. A higher score can get you a lower interest rate on your loan, and a low score can mean paying thousands of extra dollars in interest over the life of the loan.
• Employment. A study by the Society for Human Resources Management found that 47 percent of employers look at the credit scores of potential employees as part of the hiring process.
• Renting. Many landlords run credit checks on new tenants before signing a lease or rental agreements.
• Insurance coverage. Most insurers will check your credit before agreeing to provide you with coverage. Consumer Reports states that a lower score can mean paying hundreds of dollars more for auto coverage each year.
Improving Your Score
If you're planning on taking out a large loan in the near future, applying for a new job, renting a new unit, or you just want to improve your score, try these steps:
• Pay your bills on time. If you have the income to cover it but find you forget to pay from time-to-time, consider using automatic payments or our Bill Pay service.
• Pay more than the minimum payment on your credit cards. Your credit score takes the trajectory of your debt into account. By paying more than the minimum payment due, you can show you're working towards paying down your debt and improving your score.
• Pay your credit card bills before they're due. If you can, it's best to pay your credit card bills early. This way, more of your money will go toward paying down your outstanding balance instead of interest.
• Find out if you have any outstanding medical bills. If you have an unpaid medical bill, pay it. These can significantly drag down your credit score.
• Consider consolidating. If you're paying interest on multiple outstanding debts each month, you may benefit from paying off your debt through a new credit card that offers an introductory interest-free period, or from taking out a personal loan. That way, you'll only have one low-interest or interest-free payment to make each month.
Assess your credit savvy in our financial education center, Cent$ible and be sure to sign up for this month's webinar.