Whether you're a recent grad or well into your career, everyone knows their credit score matters when it comes to securing any kind of loan—but many people are still sometimes unclear on just how much their credit score effects their ability to get a loan with the best rate and terms.
It’s no secret: If you’ve ever tried to rent an apartment or buy a car, you know good credit is important. And you’re probably aware that your FICO score is used by lenders to assess your financial health and creditworthiness. It is determined by a combination of factors including payment history, credit usage, age of credit accounts, credit mix and new credit inquiries.
The bottom line? Individuals with a high credit score get better rates on auto loans, mortgages, home equity financing, and more. A lower credit score makes you a high-risk borrower, which can impact your ability to get a loan or even rent an apartment. The base FICO® Scores range from 300 to 850, and FICO defines the "good" range as 670 to 739, with excellent being 740 or above.
The good news is there are many ways to maintain good credit and even improve your FICO score.
- Check your credit report for errors. Did you know that 25% of Americans have errors on their credit report—from misreported payments to fraudulent accounts? You can review your credit report with one of the three major national credit bureaus: Equifax, Experian, and TransUnion. And you should know, checking your own score will not impact your score.
- Pay bills on time. On-time payments are one of the most important steps in building good credit—even if you can only pay the minimum due. But to really see an improvement, you must try to pay at least the minimum amount. A series of late payments also doesn’t bode well to lenders so be sure to get current on all bills.
Great Tip: If possible, set up automatic payments for bills to avoid missing a due date, and avoid collection at all costs. Did you know that paying off a collection account doesn’t remove the mark on your credit report? In fact, it will remain there for seven years.
- Pay down your debt. Debt (particularly credit card debt) weighs you down in more ways than one, including your FICO Score. Part of managing debt is paying off debt vs. transferring debt to other credit cards. Rather, pay down your card balances as much as possible and avoid too much credit use. These are ways to demonstrate to creditors that you are responsible with your finances.
- Limit your number of credit cards. Simply put, don’t open a new credit card just to get that 15% of your purchase. Frequent credit inquiries (such as applying for yet another store card you don’t need) can be a red flag to banks. So if you’re trying to improve your credit score, avoid applying for new credit for a while.
Ultimately, developing good credit involves a demonstrated habit of healthy financial choices and behavior over time. These tips are certainly a good place to start and help you get on the right path (and stay there), but they just scratch the surface of all the intricacies around credit rating. Be on the lookout for more articles and tips from us, and if you have further questions or want to know more, simply reach out. We're happy to help.