On Real Estate & More – June 2022

Your credit score determines a lot more than the loans you can get and the interest rate you pay. Landlords use credit scores to decide who they will rent to. Insurers use them to set premiums for auto and homeowners’ coverage. Credit scores determine who gets the best cell phone plans and who has to make a bigger deposit to set up utilities.

Credit scores are a financial tool, and a good credit score helps indicate your overall trustworthiness and responsibility. A good credit score could be the difference between qualifying or being denied for an important loan, such as a home mortgage or car loan. And it can directly impact how much you’ll have to pay in interest or fees if you’re approved.

The lifetime cost of higher interest rates from poor credit can exceed six figures. For example, according to interest rates gathered by Informa Research Services:

  • Someone with FICO scores in the 620 range would pay $65,000 more on a $200,000 mortgage than someone with FICOs over 760.
  • On a five-year, $30,000 auto loan, the borrower with lower scores would pay $5,100 more.
  • A 15-year home equity loan of $50,000 would cost a someone with low scores $22,500 more than someone with high scores.

Since credit scores have become such a fundamental part of our financial lives, it is important to keep track of yours and understand how your actions affect the numbers. Your credit score represents your reputation as a borrower. Your three-digit score, or FICO score, is calculated from your credit report and ranges from 300 to 850. This number simplifies all the complex and detailed information in your credit report into a simple three-digit number. In general, 680-850 is considered good credit, 600-679 is fair credit, and 599 or below is considered poor credit. This number can affect everything from your ability to borrow money, loan interest rate, car insurance rate, getting a cellphone or even getting a job!

So how do they come up with this number? It’s not as complicated as you think. You credit score is broken down like this:

  • 35% Payment History—how often you pay on time
  • 30% Amounts Owed—the % of your credit card limit that you are currently using.
  • 15% Length of Credit History—how long you have had credit in your name
  • 10% Credit Mix—what types of credit you have: auto loans, student loans, mortgage, credit cards, etc.
  • 10% New Credit—how often your credit has been checked in the last 12-18 months

Here are a few simple steps you can take if you want to improve your credit scores:

  • Pay on time, every time. A single late payment can drop your score by 30 points or more and will stay on your credit report for up to seven years! Having an account sent to collections or filing bankruptcy will also hurt your scores.
  • Keep your credit card balances below 30% of your limit. If you go over, this can substantially reduce your credit score. How many of your accounts have balances, how much you owe and the portion of your credit limit that you’re using on revolving accounts all come into play here.
  • Keep old accounts open! This helps your score in two ways; you will have a longer credit history and you will also have more credit available to you, which can help your available credit.
  • Have different types of credit. Showing that you can manage a mix of accounts responsibly can help your scores. Do not apply for lots of credit at once.
  • Check your credit report for signs of identity theft or errors. You get one free credit report from each of the three major credit bureaus every year that will NOT affect your credit score. Visit annualcreditreport.com to request a copy.

By following these tips, over time you can improve your credit scores, which is so important in our credit dependent world.