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Why Does my Credit Score Matter?

Before we get started on answering this question, let’s define what a credit score (a.k.a. FICO score) is. To put it simply, a credit score is a number that uses information from your credit report to indicate how likely you are to pay off your future debts.

Your credit score will impact key aspects of your life.

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INTEREST RATES

Borrowers with higher credit scores get higher credit limits and lower interest rates, simply because they have a track record of timely payments. Having a healthy credit score allows you to qualify for the best rates because there is less liability compared to borrowers with low credit scores.

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CREDIT CARDS, LOANS, MORTGAGES

The institutions that lend you money want to be paid back. Borrowers with higher credit scores have a history of being reliable by paying their loans back on time and in full. Lower credit scores are seen as a risk in the eyes of the lender - so borrowers with low credit scores might not be approved for credit.

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DEPOSITS & FEES

If you’re on the hunt for a new apartment, they’ll check your credit score prior to sending over the lease agreement. If you have a low credit score, chances are you’ll need to pay an extra deposit amount, or you may not be approved for the apartment at all.

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INSURANCE

In some states, home and auto insurance companies will run a credit check and determine your fees based on your score. If you have a low credit score, you’ll pay more for insurance.

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Your credit score is calculated from five groups of data that are reported to the credit bureau. The percentages in the chart reflect how crucial each of the sections is in determining how your credit score is calculated.

35%: Your Payment History. Have you made all of your payments on time? Repayment of debt is the most important part of your credit score. This includes both revolving loans (credit cards) and installment loans, like mortgages and student loans.

30%: Amount Currently Owed. 30% of your credit score takes into account the amount of credit that you are already borrowing. For example, borrowers who continuously max out credit cards are not considered people who can handle debt responsibly.

As you can tell, these two factors make up 65% of your credit score. So if you are good about making payments on time, and you don't have large amounts owed, you probably have a decent credit score.

15%: Length of Credit History. It's impossible for a person who is new to credit to have a good credit score. FICO takes into account the amount of time you've held credit, and if you have good long-term financial behavior, your score will reflect that.

10%: The Types of Credit Used. Borrowers should have a "credit mix" - which means that they borrow funds for a number of reasons. Someone who has a mortgage, student loan and credit card is more well-rounded than someone who has three different lines of student loan debt. A credit mix shows that you're able to responsibly handle credit of all types.

10%: New Credit. Your credit score takes into account how often you're requesting for credit. Someone who takes out five credit cards gives off the image that they are in financial duress, so it's best to take out loans only when it makes financial sense.

STUFF HAPPENS.

If you've missed payments on accident - for example, during a busy move or after a hospital visit - it will affect your credit score, but it's not the end of the world. You can turn around your credit score by planning out (and sticking to!) a budget, making on-time and in-full payments, and checking your credit score on a regular basis.

HOW TO CHECK YOUR CREDIT SCORE

1. Visit Credit Karma to get a free credit score evaluation.

2. Purchase a credit score directly from FICO and get results from the top three reporting agencies: Experian, TransUnion and Equifax.

3. Contact your bank. Often times they will have a credit reporting partnership with another institution.

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