Your credit score affects just about every part of your financial life, and that impact trickles down to many other aspects of your life. For example, a better credit score can help you qualify for the loans you need to pursue your dreams. You’ll also get a better interest rate with a better credit score.
We’ll explain why your credit score matters and then provide expert tips on raising your score, which can lead to lower payments on many things. Insurance companies use your credit report to assign you an auto insurance score and then use that as a factor in your premium calculation. And mortgage lenders use your credit score to set interest rates.
Why Your Credit Score Matters
Your credit score gives financial institutions a way to gauge your risk. Anytime a lender writes a loan, there’s a risk that the borrower will not pay the loan back. The higher the probability of that happening, the more risk the lender assumes. Your credit score is based on your credit history.
People with a good credit history are more likely to continue practicing good financial habits that puts them in control of their lives and will make them a lower risk to lenders.
Credit Score Dictates Interest Rates
One way that lenders offset their risk is through interest rates. If there’s a higher chance that you’ll default on your loan, you’ll pay higher interest rates.
Lenders tend to break down credit scores into brackets, with the highest bracket paying the lowest interest rate.
A higher interest rate means that you’ll pay more every month for the life of your loan. For example, for a home loan, often the biggest loan a person takes out, an interest rate difference of 2% could mean paying almost $400 more per month on a $300,000 loan.
Credit Score Affects Insurance Rates
While it may seem odd to many people that a credit report would have anything to do with car insurance risk, it’s common practice in most states.
Insurance companies argue that statistics demonstrate people with lower credit ratings are more likely to file a claim. Insurance companies use information from your credit report. So while they don’t use your final credit score, the information they use is closely related.
Several states restrict or prohibit insurance companies from using credit ratings as a factor in insurance premiums.
Credit Score Determines Loan Eligibility
Most mortgage lenders have a minimum credit score requirement to qualify for a loan. Some government-backed loans allow homeowners in certain situations to be eligible for a mortgage with a lower credit score than they’d need for a private loan.
Individuals may qualify for an FHA loan with a credit score of 500, but they will have to make a 10% down payment. If you want more options, you should aim for a credit score of at least 620.
It’s easier to get an auto loan with low credit. In fact, some car dealerships even advertise that they have financing available with no credit check. These loans don’t have terms or interest rates that benefit the consumer. But if you have a fair credit score or higher, you’ll likely be eligible for an auto loan from several lenders so you can shop around and choose the best.
How to Improve Your Credit Score
You can take several steps, but the one that will make the most impact on your credit is paying your bills on time.
Make On-Time Credit Payments
Your credit score is based on your credit history. When you establish a history of making on-time credit payments, your good habits pay off as an increased credit score.
If your credit is poor, you’ll see it improve within two or three months of making your payments. The steady improvement in your credit score will continue as you make consistent on-time payments. Within a few years, your credit score should increase significantly if you started with it relatively low.
Don’t Borrow the Maximum
Lines of credit have a limit. Part of your credit score is based on how much you’re borrowing compared to how high your limit is. If you’re borrowing the maximum amount, your credit score will be lower. Borrowing the maximum indicates that you have a hard time curbing your spending.
Pay down your credit card debt and decrease your spending to avoid spending more than is in your bank account. At the most, you only borrow 30% or less of your limit.
You can ask for a credit limit increase which is another way to improve your borrowing to available credit percentage.
Monitor Your Credit
You should check your credit report from all three credit bureaus regularly. Experian lets you sign up for email notifications so that you know every time your credit score increases or decreases every time. Then, you can review your credit report to make sure the reported activity is legitimate.
If you find something on your report that is suspicious or fraudulent, you can dispute it with the credit bureaus and help keep your credit rating a reflection of you.
Getting ahead financially is easy when high interest rates aren’t holding you back. Improving your credit score will help you get the best interest rate available so you can choose how best to use your savings.
Melanie Musson writes and researches the auto insurance comparison site, AutoInsurance.org. She’s passionate about helping people understand insurance’s role in helping them become financially stable so they can enjoy the freedom of using their money to reach their goals.
