It’s like an old boyfriend: can’t live with it, can’t live without it. “It” is your credit score, and if you plan to borrow money at some point in life—whether for a car loan, mortgage, or student loan—you’d be wise to keep an eye on it. Wait, what is a credit score, you ask?? Let me break it down for ya:
- What it is. Your credit score is a number reported by various credit bureaus. The biggies are Experian, TransUnion, and Equifax. They all use different algorithms to calculate your score, and so have slightly different credit ranges, but most credit scores fall between 300 and 850. Anything around 700 is considered good.
- How it affects you. Your credit score is the main factor in determining whether or not you qualify for a loan, and the interest rates you will be charged on that loan. You guessed it: the better the credit score, the better the interest rate, and vise versa. Your credit score can also impact your insurance rates and even your prospects when applying for a job. It’s like the real life version of a report card: it gives your potential employer an idea about how responsible you are. If they see things like late payments, lawsuits, or tax liens they might question your judgment. Remember, you need a score of at least 760 to be approved for most federal loans.
- Where to find it. Yes, you can find your credit score for free online. But watch out for gimmicks (www.freecreditreport.com being one of them!) which will loop you into a monthly membership program with a “free” initial report, but then make it almost impossible to get out of the monthly fee. I like annualcreditreport.com for a free report (remember, you’re entitled to one free report per year) or invest the $19.95 in myfico.com (trust us, it’s worth it) and gain access to useful advice on how to boost your score.
- What you can do to improve it. Like anything else in life, there is always room for improvement. Recent reports say that the average credit score for a federally backed loan is currently around 760, the highest ever. And it makes a big difference: a difference of just 40 points can change your rate by a quarter of a percentage point. There are lots of ways to improve your score, but let’s start with the most obvious: get a credit card if you don’t already have one. If you can’t qualify for a regular credit card, look for a secured credit card, where the bank gives you a credit line equal to the deposit you make. You also want to look for a card that reports to all three credit bureaus.
- What can make it decrease. Your payment history makes up about 35% of your credit score, so the easiest way to send your score down the you-know-what is by, you guessed it, making late payments. By all means, do not miss a payment altogether; you could get knocked 100 points or more. Watch out for maxing out your card, too. Lenders like to see a big gap between the amount of credit you’re using and your available credit limits. So if you can, get your balances below 30% of the credit limit on each card; 10% is even better! Finally, think twice before cutting up those old credit cards and closing their accounts. They are part of your financial history, and lenders like to see positive credit history before they give you more dough. Instead of closing them all together, designate these older credit lines for a single recurring payment, like your monthly cable bill, to keep the good credit coming without being tempted to overspend with them.