It’s vitally important because it tells potential lenders how creditworthy you are.
When you have a high score of 720 or above creditors see you as being a good risk. They will not only loan you money they will do it at very low interest rates.
Apartment managers and homeowners will be more likely to rent to you if you have a good credit score.
You’ll even pay less for your insurance.
How your credit score is calculated
It’s calculated using a complex series of algorithms but is based on five components. The most important of them is your credit history as it accounts for 35% of your score. Second in importance is your credit utilization ratio, which makes up 30% of your score.
4 things that will damage your score
1. You can probably guess the first of these as it’s late or missed payments. While just one will not seriously damage your score a history of missing payments will definitely cause it to suffer. This goes back to your credit history or that component that accounts for 35% of your score. Plus, your creditors are more than happy to charge you late fees or even increase your interest rate after you’ve missed a few payments. So, this ends up costing you two ways. There are those immediate fees for missing payments plus the increased interest rates you’ll be required to pay later on loans and credit lines.
2. The second thing that can damage your credit score is your credit utilization. This is usually expressed as a ratio and is derived by dividing your total amount of credit into the amount you’ve used. As an example of this, if you have $15,000 in credit available and have used $5000 of it your credit utilization would be 33%, which would be close to okay.
However, if you calculate your debt to credit ratio and it turns out to be 35% or higher, you need to get to work to fix this. There are two ways you could improve it. You could either pay off some of your debt or you could get new credit. For example, if you could get a $10,000 personal loan and use $5000 of it to pay off your current debts, your debt to credit ratio would be 20% and this should give your credit score a nice boost.
3. A third thing that will damage your credit is if you lose your job. This happens to almost all of us at one time or another. If you get unemployment benefits this will affect your credit score a bit, which is why you want on it to get those benefits for as short a period of time as you can. Credit bureaus don’t know you’re unemployed. But they will recognize that your income has gone down. This would likely change your ability to pay your debts in a timely manager and will cause your score to decrease.
4. If you make too many request for credit within a short period of time this, too, will hurt your credit score. It can be especially damaging if you apply for several lines of credit. For example, if you were to apply for a homeowner equity line of credit this month then next month a debt consolidation loan and then a car loan the following month, this would definitely cause your credit score to take a hit. In fact, it will probably plummet. While this may be only temporary it’s something to keep in mind especially if there is some reason why you’re beginning a “new chapter” in your life.
Why monitor your credit reports
There are two good reasons you need to monitor your credit reports on a regular basis. The first of these is because errors could creep in. The three credit bureaus process hundreds and hundreds of pieces of information a day and mistakes can be made. Serious errors will affect your credit score so if you find any you need to dispute them.
Second, you could be the victim of identity theft. A crook could have stolen your name Social Security number and used the information to open new accounts. If you’re not reviewing your credit reports on a regular basis you could totally miss this.
Federal law requires the three credit bureaus to provide your credit reports free once a year. You can also get yours free on the site www.annualcreditreport.com.
What some experts advise is to get your reports one at a time every four months. This is sort of a way to monitor them at no cost.
Watch your credit score too
You should also keep an eye on your credit score. You can get it free on sites such as CreditSesame, CreditKarma and Credit.com. It’s not necessary to get your score every couple of weeks but it might be a good idea to check it semi-monthly. That way, if you see it’s gone down dramatically, you could get to work, determine what caused it and possibly get it corrected.