I would not have my job if I had bad credit.
Before I was a diplomat, I went through an extensive background check; and they verified everything on my credit report including my student loans and retail store credit cards. Any negative information could have affected my ability to serve my country and provide an income for my family. Now my credit is checked periodically, but I keep it intact for myself and for my family’s sake. I work hard to keep a good credit score.
I learned early on the importance of a strong credit score and how to protect my credit. Let me share some of these tips with you so you can avoid critical mistakes or take the necessary action to improve your credit score. A good credit score and strong credit report grants individuals opportunities in life and, most importantly, saves you money.
What’s a credit score?
A credit score is a three-digit number that is based on your borrowing history and credit file. There are different types of credit scores, but the one most commonly used by lenders is the FICO credit score.
In the 1950s Bill Fair, an engineer, and Earl Isaac, a mathematician, created a calculation system that later became the FICO score in 1989. A good credit score was one of the first items retail stores and lenders could use to evaluate if someone should get a loan or credit.
Your FICO score can range from 300 to 850. If you have a good credit score, meaning a high credit score, lenders assume it is less of a risk to loan you money. If you have a lower score, it is assumed you are a greater risk and may default on your loan. Employers may also use your credit score to determine your judgment and ability to perform a particular job.
A Low Credit Score Will Cost You
Your credit score doesn’t just affect whether or not a lender loans you money. It can also affect what interest rates a lender offers you if they decide to loan you money. Typically, lenders offer individuals with lower credit scores higher interest rates. On the other hand, customers with higher credit scores are offered lower interest rates.
For example, if two people were considering buying a home, the one with the higher credit score could be offered a three percent interest rate, whereas the applicant with a low credit score might be offered a six percent interest rate. Think that’s not a huge difference? Think again.
Two people purchase a $100,000 house with a 30 year fixed mortgage
| Interest Rate | Monthly Payment | Total Paid for the House | Total Paid in Interest |
| 3% | $421.60 | $151,777.45 | $51,777.45 |
| 6% | $599.55 | $215,838.19 | $115,838.19 |
With a home the difference is huge, but the same rules apply for credit card interest rates too. The higher your credit score, the less you pay in credit card interest if you do not pay your bill off at the end of the month. So those with lower credit scores, who do not pay their balance in full every month, also end up paying more for their purchases.
Factors that Affect Your Credit Score
Your credit score is based on 5 things, but it’s important to pay attention to each factor to have the best overall score.
Payment History (35%): On your credit report, lenders look to see if you consistently pay your bills, and more importantly pay them on time. One late payment can result in a late fee to your lender and can significantly decrease your credit score. Regardless, whether you have ten credit cards or just one, always pay your bills on time. Bills are not limited to credit cards. They also include, but are not limited to cell phones, utility bills, and your mortgage. Cell phone and utility bills are not constantly on your credit report, but if you do not pay these bills the vendors have the right (and often do) put negative remarks on your credit report.
Debt Utilization Ratio (30%): Having a lot of credit cards, outstanding loans, or other debt is not necessarily a bad thing. What matters is how much of your credit you are using, this is known as your debt ratio. If you have three credit cards and you are maxing them out, this can lower your credit score. It’s best to not use more than 30% of your available credit. So, if you have a card with a $1,000 limit, do not carry a balance of more than $300.
Length of Credit History (15%): The longer you have a relationship with a lender, the better. This encourages more lenders to lend you money. So even if want to close some credit cards, think long and hard about it first. If one of those cards has been on your credit report for the last ten to fifteen years, keep it. If you are worried about overspending, lock it away (or give it to a trustworthy friend), use it every once in awhile, but don’t close it if you don’t need to.
Type of Credit (10%): Just like you would diversify your investment portfolio, you should diversify your credit. This means try to have a mix of credit card debt, student loans (if you need to–don’t get these just because I said so), a mortgage or installment loans. Installment just means the payments are the same every month and the money is only paid for a fixed amount of time, like a mortgage or car loan.
New Credit Requests (10%): How often you request credit can also affect your score, so if you are shopping around for a car or home loan its best to do so in the same period of time say a two week period or the same month. If possible, ask the lender to give you a range of the interest rates they would offer to someone with your credit score and then only let the lender you are most likely going to use run your credit. It’s best not to have more than two inquiries on your credit report in a given year.
Where Can I Find My Score?
There are three major credit bureaus that maintain your credit information. Equifax, founded in 1899, is the oldest, followed by TransUnion and Experian. Each bureau can contain different information about your credit history and sometimes negative information is only known by one bureau and not the other two. This is why your score may vary slightly from one bureau to the other.
By law, everyone has the right to have a free credit report once every twelve months. However, only the report is required to be free–not the credit score. To access your report visit www.annualcreditreport.com. The FACT Act requires all three agencies to provide reports and the scores can be provided for a nominal fee. If you find any errors on your credit report, you should report them to the credit bureau immediately. They have 30 days to respond to your letter and if they cannot find evidence to support the information they must remove it from your credit report.
Check out Equifax Data Breach What You Need To Do.
Monitor Your Score for Free
One of the best ways to monitor your credit report and score for free is through websites like Credit Karma or Credit Sesame. Credit card companies like Discover, Citi, and Capital One also offer you access to your credit score for as long as you are a customer. Check to see if your bank or credit card companies offer this benefit too.
Tracking your credit score on a regular basis and catching mistakes is important. You can catch signs of identity theft, correct incorrect information when it pops up, and ensure you aren’t surprised the next time you try and get a loan.
If you need to improve your credit, there are also free resources out there that can help. Some companies that have been connecting users to credible companies that can help are SpringFour and Operation Hope.
So if you have no idea what your credit score is, look it up now. You cannot know where you are going if you do not know where you stand. Once you review your credit report for accuracy, write out a plan on how you want to use your credit so it remains strong and gives you access to the best interest rates, available credit, and jobs.
What are some interesting stories about you credit score? Share your comments below and join the community to learn more about money, investing, finances, and more.
Acquania Escarne is the creator of The Purpose of Money, a community of women building generational wealth for their families one dollar at a time. As an entrepreneur, real estate investor, and licensed insurance agent, Acquania has always been passionate about financial literacy. On her website, Acquania blogs about ways to help you improve your money habits, create wealth, and invest in real estate. Follow Acquania on social media for daily tips.
I’ve built my credit steadily over the years. I’m now above an 800. I finally broke that barrier because my credit utilization is super low because of the newest card I opened. I’ve gone from being in collections right out of college and having a ton of maxed out store cards to finally figuring out how to use credit cards to my advantage (hello rewards points).
What would be great is a part 2 to this article walking people through how to improve their credit. Are the credit fixing companies worth it? Can you do it yourself? Should you pay collection agencies? Do unpaid debts really fall off your credit report after 7 years? All of that information would be helpful to many, I’m sure.
Great suggestions! Thanks for sharing your story.
That would make a good follow up post. Will have to look into it.
Personally, paying bills on time and reducing my credit card utilization through new travel rewards cards have helped me the most … but I’ve had good credit since I was in college, so wasn’t really starting from the bottom.
– Damien
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