What’s in a score?
Strong credit is the first step to homeownership and more
Quick question: Right now, without looking, do you know your credit score?
Do you even have a credit score? More than 26 million Americans don’t, due to a lack of credit history. If you’ve recently tried to buy or rent a house or purchase a car, you probably have a good idea, for better or worse, whether you have good credit. But for most of us, our credit score is something we only think about when we need it for those big, once-in-a-decade buys.
The truth is, while you probably don’t need to know your exact score at a moment’s notice, it’s always with you, constantly changing as you pay your bills, use your credit card, and open new accounts. And it’s not only important for that number to be as high as possible when you need to borrow a large sum of money for a new home or vehicle. From helping you secure your first rental apartment to getting car insurance, there are plenty of everyday reasons why you should stay on top of your credit.
And even if you don’t think you need good credit now, you never know what the future might hold. Establishing a sound, strong credit history can help open doors to opportunities like becoming a homeowner, owning a business, or even going to college.
Amount of outstanding debt
Bill-paying history
Number of loans or accounts
What is a credit score?
Even people who regularly check their credit score might not know exactly what it is or what it really means. And if you want to know why that number is important, it helps to understand how it’s established and built.
Simply put, your credit score is a predictor of how likely you are to pay back a loan on time. Independent agencies, called credit bureaus, gather information from a wide variety of creditors — from public utilities to banks to credit card companies — and they compile it into your credit report. A typical report includes things like:
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Whether you have had a debt collection, foreclosure, or bankruptcy
New applications for credit
The bureaus boil down that report by running that info through a mathematical formula to produce your three-digit score, which usually ranges from 300 to 850. The higher your score, the more likely the model predicts you will be to pay off a loan in a timely fashion and the better your credit is. (NOTE: You don’t have just one credit score — there are several bureaus who calculate scores in slightly different ways at different times, so on any given day, you could have two or three different and equally important credit scores.)
How to build credit: Early and often
It generally takes six months to start establishing a credit history, depending on the scoring model. However, it’s much easier and faster to harm your credit score than it is to improve it. That’s why it’s important to start building credit as early as possible.
According to the Consumer Financial Protection Bureau (CFPB), here are some ways you can get started in building your credit:
1. Pay your bills — rent, utilities, loans, and medical bills — on time, every time.
2. Stay within your credit limit — in fact, experts suggest only using 30% of what you have available.
3. Check your score. Each of the three major credit bureaus offer a free annual credit report. Make sure you review those and report
and contest anything that seems amiss.
4. Open and use a credit card wisely.
Why it matters
As mentioned, a good credit score is not just important when you want to take out a sizeable loan. A high score can also be key to other benefits you might not even realize. For example:
• Good credit can qualify you for lower interest rates on loans, mortgages, and credit cards.
• Some would-be employers may check your credit as part of their background check. If they see you are late on payments or have
accounts in collections, they might think twice about offering you the job.
• Better credit qualifies you for better credit cards that not only have more favorable rates, but also many that offer better perks and
more robust rewards programs.
• Many utility companies check your credit before establishing service. A bad score might impact if you have to pay a deposit to
obtain a utility service, for example.
So, if you haven’t established credit history or know you need to improve your report, now is the time to start.