Most consumers understand how a good credit score can open doors. Lenders feel more confident working with borrowers who have a track record of timely payments, which is why the lowest interest rates go to those with the highest credit scores.
Borrowers might be acutely aware of the perks of good credit, but they’re less versed in the consequences of a low credit score. Part of this is because of information overload. If you’ve taken advantage of the opportunity to receive your credit score for free from any of the major credit bureaus, you might have a sense of the confusion and frustration that can accompany several different three-digit numbers staring back at you.
The prospect of digging into the fine print to learn the reasoning behind their scores overwhelms most consumers, leading to missed opportunities to boost or safeguard those numbers. Whether your credit score is excellent or subprime, it’s important to understand the factors at play and the associated risks.
The Steep Cost of Poor Credit
A credit score might seem like a haphazard figure plucked out of thin air, but a lot of information factors into the measure.
Aside from Experian, which uses a scale of 330 to 830, credit reporting agencies issue scores ranging from 300 to 850. Each company uses slightly different scoring models and schedules — the cause for discrepancies in your numbers — but these models draw on similar criteria.
Depending on your score, creditors might refuse to give you a loan or tack on high interest rates to protect their investments. But past this surface level, the consequences of bad credit are everywhere. Landlords are able to check credit scores before approving tenants, and utility companies can insist you pay a substantial security deposit if your credit score is low. Although smartphones have become a way of life, carriers also vet customers using credit.
If these consequences come as a shock to you, at least you’re in good company. A Harris poll survey indicates that nearly a quarter of Americans are unaware that their credit scores could affect rental applications. Whether you realize it or not, your credit score can be the gift that keeps on giving or the monkey on your back.
Making the Most of Your Credit Score
As the saying goes, knowledge is power. The following tips can help you achieve enviable credit and protect yourself from financial hardship:
- Monitor your credit reports.
Review your credit report at least once a year to look for reporting errors and fraudulent activity. If you’re unable to secure credit on your own because of limited data on your report, ask a close friend or family member to make you an authorized user on one of his or her credit cards. That person’s credit line and history will appear on your report and raise your score, which can be a tremendous boon to your report.
- Keep your old accounts open.
It might seem like a great idea to clear out the clutter and only manage accounts you regularly use, but eliminating accounts could lower your credit score. Credit age and type account for 21 percent of your credit score, while credit utilization ratio accounts for 20 percent. The longer an account has been open, the more of an asset it becomes. In addition to naturally increasing your credit age with time, having several accounts with low activity can boost your utilization ratio.
- Be discerning about which accounts you open.
Resist the urge to jump at every credit card offer with bonus travel miles or cash back bonuses. Those incentives are helpful in the short term, but your credit score temporarily drops every time a lender pulls your credit report to assess an application.If you’re establishing or rebuilding credit, research the best credit card for no-credit borrowers and stick with the most reasonable offer available. As your score increases, you might choose to apply for some premier cards. It’s fine to grow your credit arsenal, but exercise restraint and be mindful of the effect on your score.
- Reduce the amount of credit you’re using.
Never use more than 30 percent of any credit line. Maxing out your credit cards can drag down your score, and it can make it increasingly difficult to pay down your mounting debts. Instead of racking up the debt and paying a lump sum at the end of the month, pay off your charges several times throughout the month.
- Maintain a good repayment history.
On-time payments are the most critical component of a healthy credit score. If you’re unable to pay your balance in full, at least make a minimum payment by the due date each month. Most lenders allow you to set up automatic payments so you don’t have to worry about missing any due dates.If you have no repayment history, take out a small personal loan to cover a purchase. Your interest rate might be a little higher because of your lack of repayment history, but making regular payments on the account will quickly boost your credit score.
Understanding how credit scores are calculated and what they mean for your financial health can be overwhelming at first. But educating yourself will help you make better decisions and adopt a strategy to proactively improve your score. Regardless of where your credit falls today, a responsible approach to borrowing can help you achieve a high credit score and keep it there.