It may sound strange, but a 3 digit number can have a significant impact on your life. Your credit score has a direct impact on the rates you pay on financing and auto insurance, your ability to get a checking account, apartment or cell phone, and it may have an impact on any government assistance that you apply for.
You may think of your credit score as a black box. Many people do. Most just do the best that they can with their finances and just have an “it is what it is” attitude with their credit score. The truth is, these scoring agencies publish the criteria they use in calculating your credit score. That means you can know what goes into your credit score and you do have control over that elusive number.
What Goes Into a Credit Score?
Each credit agency’s scoring model is slightly different; however, the criteria used in the models are fairly straightforward. They look at your payment history, the amount of debt that you have outstanding in relation to your total credit lines, how long each credit line has been open, the frequency of new credit accounts, and the mix of trade experiences that you have.
All of these are factored together in a somewhat secret formula determine your credit score. Each credit agency has a different formula and a different minimum and maximum value, but most scores range from 400 to 900. To give you a better idea of where you stand, the national average credit score is 687.
Why Your Credit Score Matters
So you have a credit score and you now at least have an idea of why your score is what it is. Why should you care? What bearing does it have on your life?
The first thing that probably comes to mind is the interest rate that you’ll pay on any loans or credit cards that you have. This is pretty straightforward. If you have a low credit score, it’s probably because you missed a few payments or even lost a house or had a car repossessed. It makes sense then that a lender will charge you a higher interest rate since your history demonstrates that you’re a high risk borrower.
A little less known fact is that most auto insurers check your credit when you apply for a policy. Insurance companies determine premiums based on your expected risk level. They know the higher the risk, the more likely they will have to pay a claim so your premium is higher. Most insurers see bad credit as an indication of a higher risk and they will charge you a higher premium.
Banking, Leasing and Other Services
A checking account seems like a simple service. It should be as simple as completing a few forms, right? Many banks will check your credit before opening a checking account. A low credit score indicates a higher risk that you will write a bad check. If they think that risk is too high, they won’t open a checking account for you.
The same applies when you’re renting an apartment or trying to get a cell phone. A low credit score says that you’re a higher risk. That means a company may charge you more or may not want to do business with you at all.
Repairing a Bad Credit Score
If you’ve made some mistakes and your credit isn’t great, all hope is not lost. You are ultimately in control of all of the factors that impact your credit score. The first thing to do is follow the basic steps to build your credit.
The second thing you can do is look into professional services that can help deal with more complex issues. Many online credit repair services keep up active social media profiles to provide additional info.
As you continue to manage your finances responsibly your credit will improve. Even the worst negative marks fall off your report after 7 years. It may not be easy, but it’s worth the work since your credit score impacts so many areas of your life.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.