What is a credit score anyways? Your credit score is a measure of your likelihood of paying back borrowed money. Scores range from 300-850, and a higher score means you’re less likely to default on credit cards, loans and other expenses. Good credit is the first step to financial freedom and an integral part to building wealth in America.
Why is having a good credit score important?
1. Good credit affects where you can live
This is probably the second most significant number to every American today, only second to your social security number. This number is what can truly change your life, not who’s elected president or who’s nominated to the Supreme Court. A good credit score can mean you’re more likely to be approved for a home loan and can affect the interest rate you get for that mortgage. This directly affects how much you can afford and thus what neighborhood and type of house you can purchase! Even if you’re not in the market for a house, you should seek to eventually! I can go into detail why homeownership is so important in another article, but homeownership has historically been the number one way to build wealth in America. (I don’t see this changing anytime soon)
2. Credit checks for employment
Many employers check credit scores as part of their hiring process. If you haven’t demonstrated financial responsibility, an employer might be hesitant to hire you. For example, an employer may see your level of debt as too high for the salary offered. Some employers also run credit checks reports before giving promotions or raises, particularly for financially-related/executive positions. Why would they hire someone who can’t handle their own finances to manage their company’s finances?
3. Living expenses
Want to buy a car? You probably will need a loan, for which you will need to have good credit to get a good interest rate. Need utilities? Electric companies probably will check your credit score before turning on your lights! This is not limited to just electric utilities, cable, phone, and water can and often will run credit checks too.
I understand why I need a good credit score, but how do I improve it?
Pay EVERYTHING on time – Your payment history is the largest portion of your credit score. The more on-time payments you have, the better. This includes, utility bills, rent, student loans, phone bill, etc. Turn-on auto-pay if you need (I do this!), add notifications on your calendar (I’ve done this too!), by any means necessary – do not miss any payments! If you’re behind, catch up as quickly as possible. Make the necessary sacrifices to save more, you won’t regret it.
Keep your credit card usage low – By keeping your credit card balance below 20% of your credit limit, you can slowly increase your credit score! For example, if your credit card limit is $5,000, you would want to stay below $1,000 per period. People with credit scores above 800 on average utilize 11.5% of their total credit according to Experian. If you are spending more than this, there are two avenues I would recommend, apply for a line of credit increase and/or apply for another credit card (What credit cards do I have?).
Avoid checking your credit – Every time you check your credit, a record is made on your credit report. This accounts for approximately 10% of your credit score, which may not seem like much but can mean the difference between getting a home loan vs not.
Time is your friend – If you do have late payments or other negative items on your credit report, don’t worry. Most of these items will fall off your credit report after seven years. Consistency is key, it’s never too late to start improving your credit score! If there is a mistake on your report, make sure to clear them up right away.
Ultimately, your credit score can have the most influence on your ability to live a comfortable and fulfilling life. It’s important to understand why it is important, how it’s calculated and how you can improve it! As a recent college grad, I understand the struggle many people my age are going through during these unprecedented times. I hope that I can help reduce the knowledge gap surrounding personal finance and do my part to making the world a better place. Let me know your thoughts and concerns!