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Your Credit Score And Your Life

A credit score is designed to provide companies and lenders with a way to judge your ability to handle credit and debt...

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When you are trying to navigate all things financial, there are two numbers that you should always pay close attention to: your social security number and your credit score. Both numbers provide information about you and are necessary for you to be able to do things like open bank accounts, get insurance, and apply for credit and loans. However, unlike your social security number, your credit score can change depending, primarily, on the financial decisions you make.

What is a credit score?

A credit score is designed to provide companies and lenders with a way to judge your ability to handle credit and debt. A credit score can range from a minimum of 300 to a maximum of 850. When companies see a high credit score, usually a 700 or higher, they have greater confidence that what they loan you will be repaid on time, and eventually in full.

The two primary providers of credit scores are Fair Issac Corporation (FICO) and Vantage Score Solutions

Both companies use a combination of your debt repayment history (35%), the amount of the credit limit on your credit cards you have used (30%), the mix of credit and loans that you have (15%), the length of time you have had credit (15%), and the number of hard inquiries for credit you have (5%) to come up with your score. They get this information about your financial behavior from the three main credit bureaus, Experian, Transunion, and Equifax.

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What values does a credit score have?

Unless you have significant savings and are able to pay cash for large purchases such as a mortgage or a car, you will likely have to apply for a loan. Most lenders and credit card companies require that you pay interest on top of your regular repayments to them (these payments are called principal payments). This is how lenders make their money. Your goal as a consumer should be to pay the least interest possible to the lender. Of course, you first have to shop around to find a low rate. However, if your credit score is less than ideal, you may find that lenders will not approve you for the low-interest rate and offer you a higher rate instead. 

Breaking it down

The translation of interest rates to actual dollars can result in you paying much more out of pocket than you intended. For example:

  • Mortgage 1:
    • $320,000 mortgage loan  
    • 30 year/360 month repayment term
    • 3.65% interest rate amortized monthly
    • Monthly payment: $1,463.87
    • Total interest paid: $206,993.41
  • Mortgage 2:
    • $320,000 mortgage loan
    • 30 year/360 month repayment term
    • 8% interest rate amortized monthly
    • Monthly payment: $2,348.05
    • Total interest paid: $525,296.79

The total difference in the mortgage loan example is $318,303.38! This example shows you how much money you, by repaying with a lower interest rate, could be saving and not paying out to a lender! 

Having a good credit score means keeping more of your money where it belongs – with you.

Where to find your credit score

Under the federal Fair Credit Reporting Act, you are allowed to get one free copy of your credit report per year from each of the three credit bureaus. This law, however, does not cover credit scores and as such both FICO and Vantage Score charge a fee if you obtain your credit score through them directly. Your bank or credit union may offer you the ability to access your score (usually from FICO or Vantage Score) through their platforms for free. Or, you can go to online sites like Mint.Com or Credit Karma which also offer access to your score for free.

How to maintain your credit score

There are several factors that contribute to your credit score. The two most important factors are making at least the minimum payment for each of your credit cards and loans on time each month (of course you are always allowed to pay more than the minimum payment and doing so can save you money in interest charges) and not having a balance on your credit card that is greater than 30% of your available credit limit. These two factors alone make up 65% of your credit score.

To avoid late or missing payments, most companies offer the ability to enroll in automatic payments. This is an easy way to get your payments made on time. What should you do though if you find yourself at any point unable to make the minimum payment? Contact the creditor or lender before your payment becomes due and ask to renegotiate your payments.

Even just one late or missing payment on an account can hurt your credit score significantly so you should try to avoid having that happen.

The second part is that you should consciously minimize how often and how much you charge to your credit card so that you don’t use too much of your credit limit. This sounds simple but can be deceptively difficult, especially with all the messages you get through television, movies, and social media. Don’t mistake a want for a need and end up charging more to your credit cards than you can afford to repay.

Actionable Steps


1

Research a way to obtain your credit score for free

Check with your bank, credit union, or online sites like Mint.Com, Credit Karma, or Credit Sesame.

2

If your score is low…

If you discover you have a lower credit score than you were expecting, look at the details in your credit report. You can get a free copy from each of the three bureaus once a year.

3

Sign up for automatic payments

Sign up for automatic payments for each of your credit cards and/or loans through your creditor or lender. If you don’t want to use automatic payments, make sure to add a reminder to your calendar that gives you a heads up 2-3 days before your payment is due.

About the Author


Dawn Torres-Gale, AFC

Dawn Torres-Gale, AFC

Accredited Financial Counselor

In 2008, Ms. Torres-Gale was chosen by the Financial Industry Regulatory Authority (FINRA) Foundation to be part of a select group of military spouses. Through this, she received FINRA sponsored training from the Association of Financial Counseling, Planning and Education and became an Accredited Financial Counselor® in February 2012.
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