Credit scores impact more than how much money you can borrow for a house or a car. Your credit score is a window into your financial responsibility. Many institutions will use this score to assess trustworthiness and integrity. That is why understanding and approaching a bad score with intention is so important. This blog post explores the importance of credit scores and how to start fixing your credit today.
Understanding Credit Scores
Most lenders utilize a variation of the FICO score to assess the reliability of an applicant. FICO scores require three essential prerequisites:
- The person associated with the score must be living. Thousands of people are mistakenly reported as deceased yearly, so verifying that you are not in that group is crucial.
- FICO scores require that you have at least one account that's been active for a minimum of six months.
- At least one account in your name should be reported to the reporting agencies.
Alternatively, a lender might consider the VantageScore over the FICO score. While the FICO score needs roughly six months to be generated, a VantageScore can be established in about two months. Both scores are comparable; however, VantageScore weighs the age of credit history less heavily.
A credit score reflects your creditworthiness – the higher your score, the more favorable your creditworthiness. A good to exceptional score can help you in many ways.
FICO Score Ranges:
● Exceptional: 800 and above.
● Very good: 740 to 799.
● Good: 670 to 739.
● Fair: 580 to 669.
● Poor: 579 and lower.
Vantage Score Ranges:
● Excellent: 750 to 850
● Good: 700 to 749
● Poor: 550 to 649
● Very poor: 300 to 549
Why Is Credit Score So Important?
Establishing credit is the first step in earning a credit score, but why is your score so important? Without a solid score, you face higher interest rates on loans for cars, home mortgages, credit cards, and even rent. Today, employers often use these scores as part of their vetting process, and lower scores indicate financial irresponsibility, often negatively affecting your chance of employment.
Other reasons credit scores are essential include:
Loan and Credit Card Approvals
Your credit score is often the first metric lenders and credit card companies examine when you apply. A good score typically signifies financial responsibility. It indicates to lenders and credit card companies your likelihood to pay back what you borrow, increasing your chances of approval. A lower score can raise red flags, leading to denied applications or offers with less favorable terms. It's not just about getting approved; it's about securing the best possible terms.
Influence on Interest Rates
Your credit score has an impact on the interest rates you receive. If you have a good score, you can enjoy lower interest rates, leading to reduced monthly payments. Lower monthly payments result in considerable savings over the duration of a loan or card balance. A lower score often leads to higher interest rates, resulting in higher costs in the long term.
Your living situation can be significantly affected by your score. Landlords often conduct credit checks as part of the rental application process. A good to excellent score can open more options for you. At the same time, a poor one might lead to rejected applications or demands for higher security deposits. For those looking to buy a home, lower scores often create a challenge in securing a mortgage. Lower scores also often result in higher mortgage rates, making homeownership more costly.
Employment and Personal Reputation
Many employers are integrating credit checks into their hiring process, 51%, in fact. This is especially true for positions that involve finances. The good news is if an employer is looking into your credit, it typically means they are interested in hiring you. However, a low score will indicate unreliability or poor decision-making, adversely impacting your chances of securing employment. A favorable score enhances your standing and demonstrates your responsible nature in different aspects of life.
Common Mistakes Leading to a Bad Credit Score
Credit scores can go up and down without you being aware of any shift in your score. It is crucial to be intentional about monitoring your score and understanding common missteps that can negatively impact you, resulting in a low or bad score.
Here are some common mistakes that can lead to a lower credit score:
Habitual Late Payments
Whenever you fail to make a payment on time, it may be an innocent mistake on your part. However, it isn't reflected on your credit as a simple mistake. It raises a concern that gets noted in your history. Consistently making late payments negatively impacts your credit score. Past-due payments indicate to lenders, landlords, banks, and other creditors that you may be a risky customer. Payment history significantly impacts scores. It is vital to prioritize making payments on time.
High Credit Card Balances
Using your credit card is not a problem, but how you use it certainly can be. Using your maximum limit, or close to it, on your card can be detrimental. When using credit cards, understanding credit utilization is critical. It is the ratio of your outstanding balance to your limit. Lenders prefer this ratio to be low, ideally below 30%. So, if you're consistently maxing out your card or maintaining high balances, it could be weighing down your score.
Multiple Credit Applications
In your quest to find the best credit deal or in moments of desperation, you might apply for multiple cards or loans quickly over a short period. However, each application typically triggers a hard inquiry, which can temporarily drop your score. Several hard inquiries in quick succession can make you appear desperate for credit, leading lenders to view you as a higher risk.
Neglecting Errors in Your Credit Report
Most people do not check their reports regularly, putting themselves at risk of lower credit scores due to unjust mistakes. The Federal Trade Commission reports one in five people have at least one error on one of their reports. Even though mistakes are out of your control, they can lower your credit score and cause many other issues. To protect and improve your score, it is important to review your reports regularly. You can obtain a copy of your report every twelve months from each of the three credit reporting companies.
Tips to Start Fixing Your Credit Score Today
Improving your credit score is a process, not a quick fix. Still, the sooner you start taking steps to fix your score, the sooner you will be able to see improvements and reap the rewards.
Here are a few tips to help you start fixing your credit today:
Regularly Checking Credit Reports
Your credit report is your roadmap when working on your score. Regularly reviewing your report can help you spot any inaccuracies or unfamiliar activities. If you find any discrepancies, dispute them immediately. Every twelve months, you can check your report from the three major reporting agencies: Equifax, Experian, and TransUnion.
On-time Payments—Every Time
Consistency is key when fixing your credit score. Timely payments go a long way in raising your score over time. Whether it's a small monthly subscription or a significant mortgage installment, ensuring every payment is made on or before the due date can significantly impact your score positively. Setting up automatic payments or reminders can be handy in maintaining this discipline.
Paying Down Debt
Calculating credit scores includes reviewing the total amount of debt owed across various accounts. Reducing overall debt is beneficial for your credit health. It can help establish a consistent payment history, reduce utilization, and help you avoid other harmful activities such as delinquencies. Paying down debt also fosters trust when approaching lenders in the future.
Maintain a Low Credit Utilization Rate
The ratio of credit card balances to their limits, or credit utilization, can influence your score. Experts often recommend keeping this rate below 30%. For example, if you have a limit of $10,000, you should try to keep your balance under $3,000. Regularly paying down your balances and not maxing out your cards can assist in maintaining a favorable rate.
Avoid Applying for New Credit
Each time you apply for credit, there is a hard inquiry about your credit that can temporarily dent your score. While applying for that new card deal or loan offer is tempting, frequent applications can harm your credit. Especially when fixing your credit score, it is best to apply for credit only when truly necessary.
Credit Monitoring and Identity Theft Protection
25% of the 5.7 million fraud cases reported to the Federal Trade Commission so far in 2023 are specifically due to identity theft. Credit monitoring and identity theft protection services help you monitor your credit activities. In addition, these services ensure that any suspicious activity is flagged and addressed promptly.
Understanding your credit score and how to fix it can pave the way to a stable financial future. From securing favorable loan terms to influencing job prospects, your score plays a pivotal role. You can boost your creditworthiness by proactively addressing common mistakes and employing strategic measures. At iTHINK Financial, we want to help you embrace a proactive approach with tools like credit monitoring and identity theft protection. Don't wait, contact us today! The power to enhance your financial reputation by fixing your score can start today!