I recently ran across a cartoon of a woman going through a stack of bills on her table. She tosses a few up and delivers the punchline: “At the end of the month I throw all my bills into the air and pay the ones that land on the ceiling.”
One part of me laughed because it was a silly cartoon, but the longtime mortgage loan officer part of me thought, “Paying your bills is no joke,” because paying — or not paying — your bills is one of the factors that determines your credit score.
A three-digit number ranging from 300 to 850, your credit score is a representation of your credit history. It predicts how likely you are to pay back a loan on time; the higher the score, the better.
Your credit score is one of the most important measures of your financial health, and it impacts your life in many ways — some expected, some not-so-expected. Knowing when your credit will be evaluated can help you understand just how important it is.
5 Moments When Your Credit Score Affects Your Life
1. It impacts your ability to buy a home and affects the interest rate on your mortgage.
A higher credit score improves the chances that your mortgage application will get approved and that you’ll get a better interest rate (which directly impacts your monthly payment). A lower score, on the other hand, can disqualify you from certain loan programs and make your mortgage more expensive because your interest rate will be higher.
2. It comes up when renting a home.
A higher credit score will help your rental application stand out — in a good way — to landlords or property managers. A lower score means your application might get rejected, that you might have to find someone to co-sign for the apartment with you (someone who agrees to be responsible if you are unable to pay rent), or that you might have to pay a higher security deposit.
3. It could create issues when turning on new utilities.
When turning on new services, such as power, water, phone, cable or internet, companies will typically conduct a credit check. Having good credit will make the process easier and could prevent you from having to pay a larger deposit or get a letter of guarantee (like a co-signer, this letter is from someone who will agree to pay your bill if you don’t).
4. It determines whether or not you can buy a car, and it affects your rate.
When purchasing a vehicle, most people don’t have the money to pay for it outright, and they have to take out an auto loan. Auto lenders will check your credit to determine your eligibility and rates. Generally, having a good credit score will make the application process go more smoothly and will help you get the best auto loan rate. It could also help you qualify for special financing offers.
5. It could affect your job prospects.
This one might be a little unexpected. Employers in many states have the right to check prospective employees’ credit histories (there are a number of rules that have to be followed, of course). According to the credit bureau Experian, employers only see a modified version of your credit, not the credit score that a lender would see, but it can still bring concerns to light. If you haven’t demonstrated financial responsibility, employers may be hesitant to hire you.
Understanding Credit, and What’s a Good Credit Score?
You’re probably familiar with the terms “credit reports” and “scores.” Let’s make sure you have a complete understanding of both because they are actually two different things. According to the Consumer Financial Protection Bureau, “A credit report is a statement that has information about your credit activity and current credit situation, such as loan paying history and the status of your credit accounts. Your credit scores are calculated based on the information in your credit report.”
Did you notice in that last sentence, the term “credit scores” is plural? That’s because you have different scores, and that’s because there are different credit-scoring models. Lenders typically rely on FICO scores to better understand your credit. In fact, 90 percent of the nation’s top lenders use FICO scores to make their credit decisions. The FICO credit-scoring model uses the data in your credit report to determine your score. The score ranges are:
- Poor Credit: 300-579
- Fair Credit: 580-669
- Good Credit: 670-739
- Very Good Credit: 740-799
- Excellent Credit: 800-850
You are entitled by law to a free credit report from each of the credit bureaus — Experian, Equifax and TransUnion — once a year. While the reports may not match up exactly with FICO scores, you can use the reports to track and understand how your credit is trending. You can request these reports at www.annualcreditreport.com.
If you pull your report and your score isn’t where you’d like it to be, don’t worry. There are things you can do to build it up. FICO has helpful guidelines about the factors that determine your score. You can use these factors to help raise your score.
5 Ways to Improve Your Credit
1. Make on-time payments on all of your credit cards and loans.
This is known as “payment history,” and according to FICO, it has the biggest impact on your credit, representing 35 percent of your score. Remember the cartoon I mentioned earlier? Again, paying your bills is no joke! If you pay your debts responsibly and on time, it will work in your favor.
2. Pay down old debt.
This is known as “credit utilization,” and it represents 30 percent of your FICO score. Credit utilization refers to the portion of your credit limit that you’re using at any given time. The simplest way to keep your credit utilization in check is to pay your credit card balances in full each month. If you can’t do that, keep your outstanding balance at 30 percent or less of your total credit limit.
3. Keep old credit accounts open.
This is known as “age of credit accounts,” and it represents 15 percent of your FICO score. The older your credit average, the better your credit appears. It shows that you have been responsible when handling your credit. If you have old credit accounts that you aren’t using, don’t close them. Closing credit cards while you have a balance on other cards lowers your available credit and increases your credit utilization ratio.
4. Maintain a healthy blend of credit.
This is known as “credit mix,” and it represents 10 percent of your FICO score. Having different types of credit on your credit reports shows a broader capability of managing your debts. For example, having a credit card, an auto loan, student loan and a mortgage can be better than just having credit cards.
5. Don’t open new accounts too rapidly.
This is known as “new credit inquiries,” and it represents 10 percent of your FICO score. Virtually every time you apply for credit, the lender will check your credit report. When this happens, the credit report will record what's called a hard inquiry, which may cause your credit score to dip slightly for a short time. If you apply for multiple credit accounts in a short period, it can have a negative compounding effect.
Just to reiterate ...
While all of these methods of improving your score are important, I want to emphasize just how important it is to pay off your credit card debt. It’s one of the fastest ways to bring your score up. Your credit utilization rate changes as your credit card and other revolving credit account balances change. If you have the means to pay down large balances in a short period — either with cash or via a consolidation loan — your credit score will be updated as soon as your lenders report the lower balance.
Also, creditors may report inaccurate or unsubstantiated information to the credit bureaus. It’s rare, but it can happen. Check your credit report regularly to make sure everything is accurate. If you find something that isn't, file a dispute with the credit bureaus. If their investigation supports your claim, the information will be removed or modified and your credit score will reflect that change.
A Final Thought
Once you finally achieve your credit score goal, don’t forget about it. While you might be tempted to focus less on your score, it’s important to always practice good credit habits to maintain the progress you’ve made!
If you have questions about your credit score or need help building or repairing your credit, reach out. Our team of mortgage loan officers have years of credit experience and knowledge. We’d love to help you get on the right track!
Jenny Dee is a vice president mortgage branch manager in Bank of Utah’s Ogden office. She has been with the Bank since 1998 in various positions in the mortgage department. Jenny loves working with builders and realtors, helping people get into their dream homes and creating long-lasting relationships.