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Credit Score Importance

One of your most important assets is your credit score. Until you reach financial independence it can have a massive impact on your life. One of my first posts on this site talked about how to utilize this to make money. While your score can allow you to make money on the side, it can also really make your life more expensive if the number deteriorates too far. How far depends on which score is used. The average American score on the FICO scale, the score most discussed, is 695. The score is out of 850. Below 650 your credit score will begin to affect other aspects of your life and cost you money.

Ways your Credit Score can Cost You

First the obvious, a low credit score will cost you a higher interest rate on any type of loan. The best mortgage, car loan, or other loans is only available to those whom have good credit scores. With a bad credit score, your only loan possibilities will probably be Payday Lowns and Lending Club. You’ll pay dearly for that privilege with rates in the 20-30% range as opposed to good credit 4% rates.

You could have difficulty getting an apartment. Rental complexes use your credit rating to determine how risky you are which may lead to them not taking you as an occupant. You could make all the money in the world but with poor credit you might end up living in a crappy apartment with no alternative.

Utilities like phone, electric, and cable companies generally require a security deposit if you have poor credit. This allows them to lower the risk of not getting paid.

Cell phone companies also may shun you except month to month and prepaid plans. If they do take you, they will likely charge you more for the risk.

Some employers check credit reports as part of the background check. Especially in the finance world, you could find yourself rejected for a job application based on your credit history.

Insurance companies also do credit checks. Their theory is that poor credit history is tied to a higher number of filled claims. They do raise your rates based on poor credit history. In fact, in my state they even have provisos to push the companies to regularly check your report incase your credit history improved so you can get a lower rate.

Finally a poor credit score can obviously impact your ability to get credit cards and other debt instruments.

What Impacts your Credit Score?

  1. Prior Bankruptcy – It will stay on your record for 7 years, so likely not much can be done here until that time is up.
  2. Not Paying your Bills on Time – Typically, they don’t report until 30 days after due date, though I wouldn’t count on it. Again, it stays on there for 7 years. Debts sent to collections especially cause issues.
  3. Total Amount Owed – Owe more than you make a year and you will likely have problems. Pay it down and your credit will improve.
  4. Too high a dollars loaned to total available revolving credit (Utilization rate) – Once you get below 3, the impact is less and typically mean the difference between a good and a great score. This could mean a few percent on a loan. For this item your credit cards have a credit limit. The percentage of that limit used represents the utilization rate. Pay off some of the debt to improve your score.
  5. Age of Accounts  –  The longer your history of credit the better off your score. This comes from 2 aspects:
    If you take a bunch of credit right before a purchase it may indicate a future problem.
    After 2 years paid on time closed accounts disappear from your report, thus providing a lender with less information to evaluate. Whenever possible do not close credit cards, simply downgrade them to non fee cards and put them in a closet. If you do need to cancel one or 2, the impact will likely be small. If you have no credit cards, consider getting one to develop your credit.
  6. Too Many Accounts Open- See above, the hoarding of credit options may indicate the potential for a future problem to creditors. Do not open new accounts for credit cards and other things immediately prior to a major purchase requiring a credit check.
  7. The types of debt  – This one falls in line with the too many accounts open. A mortgage is viewed more favorable than a credit card.
  8.  Number of Recent Credit Inquiries – Again see above regarding the indication of a potential future problem with new credit and debt adoption. Do not have credit inquiries done for example for a credit card right before apply for a major credit purchase like a mortgage.

Do you know your credit score? You can check your credit report yearly for free at annualcreditreport.com. Consider staggering each of the 3 credit reporting agencies to check periodically throughout the year.  I am not sure if they provide actual scores.  Sites like Credit Karma and several credit cards provide free scores.

15 Comments

  1. Max Your Freedom
    Max Your Freedom March 10, 2017

    A bad credit score can have a really big impact on your finances who it comes to big ticket items like auto loans, and especially mortgages. Just a 0.5% difference in interest rate as a result of your credit score can have a huge impact on a 30-year mortgage. And easily costs in the tens of thousands of dollars.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 10, 2017

      Very true. The part that really shocked me though was the impact if your not even taking a loan. It would be easy after achieving FI to stop using credit, but that could cost you dearly in the long run even without taking a loan or being derelict on payment.

  2. My credit score is around 750. Utilization seems to have a big effect on my score. I recently bumped up my credit limits and my credit score went up 40 points.

    Thanks for sharing and have a good weekend 🙂

    • fulltimefinance@fulltimefinance.com
      [email protected] March 10, 2017

      It definitely does. I think one of the reasons despite credit card churning my score has not dropped is my abundance of open accounts is offset by an ever decreasing utilization rate.

  3. Smart Provisions
    Smart Provisions March 10, 2017

    Nice post, FTF. I agree that having a great credit score can have an impact on your finances, it can help bring in a lower interest rate on loans or even mortgages, which can range from a few bucks to a couple thousand of dollars.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 10, 2017

      Every so often I drive by the no credit no problem car lots. From what I hear ten percent is not an uncommon interest rate with bad credit. So yeah it can be extremely costly.

  4. Liz@ChiefMomOfficer
    [email protected] March 11, 2017

    My credit is frozen due to identity theft, and I won’t take out more debt, so my credit score doesn’t matter to me. It’s in the 800’s though. FYI, I don’t believe you can get a free credit score on the annual credit report site unless they’ve recently added that. The site lets you check your detailed credit report with the three bureaus. Definitely an important thing to do every year! There are several sources where you can get the score for free like Credit Karma and Discovercard.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 11, 2017

      I thought I saw a version of it on there the last time I checked my report, but I could be wrong. I get a free copy of my number via one of my credit cards which is where I normally check. Credit karma is also a good option, perhaps I’ll make some post edits.

  5. MUSTARD SEED MONEY
    MUSTARD SEED MONEY March 11, 2017

    I recently saw my credit score on Clarity Money when I signed up. It’s just shy of 800 and honestly I have no idea why since we don’t have any delinquent accounts over the years. It’s always seemed a bit opaque to me but it is what it is. Thanks for sharing!!!

    • fulltimefinance@fulltimefinance.com
      [email protected] March 11, 2017

      Anything above 750 or so seems to be treated the same. I also think different services use different scales as one of our credit cards shows my credit score at 860. Meanwhile other scales seem to top out at 850 and we show like you just shy of 800.

  6. Rich @ pennyandrich.com
    Rich @ pennyandrich.com March 12, 2017

    Many of my credit cards offer a free look at my current credit score. I really like Capital One’s version, because they have a simulator that shows how a credit score will change if you add a new account or lower your usage.

    The main reason I like keeping a high score is because I get a lot of offers and incentives from banks and credit cards, whether it’s points or 0% offers or whatever. I don’t always take them but it’s nice to know what’s available.

  7. CapitalCalc
    CapitalCalc March 12, 2017

    Nice post. A high score means better mortgage/auto and credit card rates and better prospects during job hunting,

  8. Leo T. Ly @ isaved5k.com
    Leo T. Ly @ isaved5k.com March 13, 2017

    I just signed up with credit karma recently and I was able to get a full credit report and my score for free. Before I signed up, I need to fill out a form with one of the credit beaureaux just to get my credit report but no credit score. So I was excited that some sites are now offering this service for free. It’s great to be able to check your score on demand and be able to monitor it.

    • fulltimefinance@fulltimefinance.com
      [email protected] March 13, 2017

      I haven’t used credit karma personally but I appreciate that my credit cards regularly show me my score. Thanks for sharing your thoughts.

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