Growing up, the number that most influences your life — that governs what classes you take, whether you go to that party, which colleges you're accepted to, perhaps even why you get your first job — is your GPA.
Soon after graduation though, GPA loses its sway and is packed away in a basement box with your transcript and old textbooks. In its place, a new number rises to the position of big influencer — this time for the remainder of your life. Enter your credit score.
Your credit score is not something to ignore. It will impact your ability to get a car, home or a killer credit card. Yet, according to a survey by the Federation for Credit Counseling, over 60% of people don't review their credit report, while 55% don't even know their score.
However, if you want to unlock a great credit offer with lots of benefits, you definitely need to keep an eye on your score. Here's everything you need to know about why your credit standing is important to your credit search.
1. Behind the Scenes of Your Credit Score
Credit card issuers will use your credit score to determine the type of card you'll be approved for. Other financial institutions will use it to judge your worthiness for a loan, like one for a car or mortgage. So, what is it? To take advantage of your score, we'll take you through the ins-and-outs of what it is and how it works.
Your score is the primary data point for credit card companies. Here’s why that’s important. Your credit score collects and calculates data on how you've managed past debt to predict your likelihood of repaying a future credit line — like a loan or credit card. The higher your score the better you look to potential creditors.
The credit bureaus mix the formulas behind your score. There are three major credit bureaus that calculate and track your credit score — Equifax, TransUnion and Experian. Each offers its own unique credit score as well as a standardized FICO score to hundreds of millions of consumers worldwide.
2. How Good Credit Frees You
There's a host of reasons to build a good credit score. Here are the various areas of your life that will be affected by your credit history. Home loan providers will exploit your mortgage APR. For many people, getting ready to buy a home is when they become most concerned about their credit score — and for good reason.
Not only is your score one of the major factors issuer's consider when determining whether you'll qualify for a mortgage, but it can also affect the interest rate you'll get, according to Experian. Insurance carriers also look at your score when you apply. Your credit score can affect your premiums for health and car insurance. A lower score would make you a more risky customer in the eyes of insurers.
Employers might not hire you if your score is bad. If you plan to work in fields like finance or data security, a credit check could be a routine part of the job application process. Usually, that involves taking a look at your credit report, not necessarily your score, but remember –it's all related.
Beyond simply getting approved for plastic, with an excellent credit score you'll have access to the lowest available interest rates, your credit limits will keep increasing, and you may also qualify for elite rewards programs. Such perks (like personalized concierge service and luxury gifts) are reserved for only the top tier of borrowers from credit card issuers.
3. How To Check and Correct Your Score
Before you start building or rebuilding your credit, it's a good idea to check your credit to see where you stand and make sure everything is accurate. The problem is the bureaus can make errors. Checking your report can also help you detect fraud.
The good news is that you can check your credit report three times a year for free — once with each of the three major credit bureaus. With your report in hand, it's time to take out the magnifying glass. There are a number of common inaccuracies to look for, these include accounts that don’t belong to you, things negatively impacting your score, delinquency, personal information and more.
If you find an error, you need to document it in writing. Write a clear and concise letter, listing any mistakes. Send it to the credit bureau via certified mail.
4. Improve and Maintain
It might sound counterintuitive, but building your credit does not start with a credit card. There's a healthy amount of foundational work that needs to be done before you apply for a card. That way, when you do, you'll be right and ready to take on any speed bump that might show up down the road. With your credit report in hand, here are another five ways to set yourself up for credit success:
Pay off debt. According to the U.S. Census, in 2015 the average American had $15,355 in credit card debt. Debt accounts for 30% of your credit score. That means building as aggressive a payment plan as you can is the surest way to rebuilding your credit. A great method to tackle debt is the snowball method, which suggests you focus on paying off one source of debt at a time, either the one with the smallest balance or highest interest rate.
Create a budget. If you're like most Americans, you likely have a general sense of how much you can spend but never bothered to build out a concrete expense and revenue report. The good news is that it's easier than ever today. Consider the 50/30/20 rule, the envelope method, or an app like Mint to help you get a grasp of how exactly the money is flowing.
Without a budget, any new credit card, no matter how awesome, could end up hurting your score rather than helping it. Make saving a priority. Did your credit score get burned because a family emergency forced you to max out a card or two? Growing an emergency fund is possible despite how tight you might feel your pockets are.
Tying Up Loose Ends
In today's digital world, there are tons of resources for accessing your score, correcting errors and building healthy habits. To keep your credit score on the rise, consider this;
Set up automatic bill pay. This one's great for anyone who has trouble remembering due dates. Don’t carry a balance. When you use credit cards pay off your balance each month. Pay attention to utilization. Keep credit use between 20% – 30% of your total limit. Finally, don’t spend beyond your means. If you follow these tips, you can maintain great credit, and that will help you throughout life.