How Can Your Credit Score Impact Your Financial Situation

A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. VantageScore and FICO are two of the most popular credit scoring models. Your credit scores may also impact the interest rate and other terms on any loan or other credit account for which you qualify. When it comes to locking in an interest rate, the higher your score, the better the terms of credit you are likely to receive.

Below, we’ll explore how your credit score impacts your finances and what you can do to improve it.

Highlights/Key Takeaways

• A credit score is a three digit number that indicates the likelihood you will pay your bills on time
• Credit scores range from 300 to 850 and are based on several different factors related to your credit usage.
• Higher credit score generally results in better terms of credit
• A credit score of 700 or above is generally considered good.

How Your Credit Score Affects Your Finances

Having a good credit score plays a huge role in your financial life. A good credit score can save you money and help you to achieve your financial goals. A poor credit score can make borrowing money more expensive and hamper your ability to purchase. 

A credit score over 700 or above is considered a good FICO score. If you have a lower score, you could still get approved for loans or credit cards, but you may not qualify for the best rates and terms. 

Below are the current FICO credit score ranges used to determine whether your score is good or needs improvement. 

• 300 to 579: Poor: Individuals in this range often have difficulty being approved for new credit. If you find yourself in the poor category, it's likely you'll need to take steps to improve your credit scores before you can secure any new credit.
• 580 to 669: Fair: Individuals in this category are often considered “subprime” borrowers. Lenders may consider them higher-risk, and they may have trouble qualifying for new credit.
• 670 to 739: Good: Lenders generally view those with credit scores of 670 and up as acceptable or lower-risk borrowers.
• 740 to 799: Very good: Individuals in this range have demonstrated a history of positive credit behavior and may have an easier time being approved for additional credit.
• 800 to 850: Excellent: Individuals in this range are considered to be low-risk borrowers. They may have an easier time securing a loan than borrowers with lower scores.

How Mortgage Lenders Use Credit Scores 

Your credit scores are an important factor in getting approved for a mortgage and the rates you're offered. The lenders will generally request a FICO Score. Typically, the higher your credit score, the lower the interest rates and fees and better terms you’ll qualify for.

Without a high credit score, you won’t qualify for the best mortgage rates available, which could mean you’ll end up paying more money over the term of your mortgage. The difference between 3% and 3.25%, for example, can add up, especially if you’re applying for a 30-year fixed-rate mortgage.

Let's see how a 60-point difference in credit scores affects your monthly mortgage payment based on 30-year fixed-rate mortgage for $300,000:

The money you save could be put to help your financial situation. For example, the savings could be invested, put into your retirement account or used for other important purchases. They help improve your credit score, reduce the amount you pay for the money you borrow and put more money in your pocket to save and invest.

How Other Lenders Use Credit Scores

Mortgage lenders aren’t the only lenders that use your credit scores. If you ever thought of getting an auto loan, a personal loan or opening a business, having a good credit score will qualify you for lower interest on nearly every kind of loan you might need. 

In general, you’ll need at least prime credit, meaning a credit score of 661 or up, to get a loan at a good interest rate. If you have poorer credit, you can still get a loan, but you will probably have to pay more for it or else find a co-signer.

The interest rate on an auto loan can range from 2.5% for a borrower with a credit score of 700 or more to 6.76% for those between 450 and 599. That’s a difference of thousands of dollars based on the credit score.

How Credit Card Companies Use Credit Scores

Credit card companies can pull your credit score and report to determine creditworthiness as well. Credit history is a major factor in determining whether to give you a credit card, and the terms of that credit card. The better your credit, the more likely you are to get approved for a loan with a favorable interest rate. Credit card companies typically offer their best rates to customers who have the highest credit scores.

One of the biggest benefits of having a high credit score is access to better credit offers. With such a high credit score, you’ll be an ideal candidate for some of the best credit cards available. If you are a frequent flier, you might want to consider a premium travel credit card like the Chase Sapphire Reserve® or The Platinum Card® from American Express®.

You are not out of luck though if you have a poor credit history. There are a few ways to get a credit card when you have limited or no credit, although it may involve some collateral. 

How Landlords Use Credit Scores

As part of their screening process a Landlord my run your credit score. Landlords check your credit report to determine whether they should rent to you. If you have recent delinquencies, foreclosures, or evictions on your credit report, your rental application could be denied.Your credit history can show them how you’ve managed money in the past and help them determine whether you might be a responsible tenant. A poor credit score can be a red flag for a landlord. If you have poor credit, landlords may require you to have someone cosign your lease. 

How Utility Companies Use Credit Scores 

Before you can establish utilities, the company typically checks your credit scores. Checking your credit gives a utility company an idea of your bill payment history, including whether you've made timely payments.

The utility company may rely on information in your credit report when deciding whether to provide services to you. If your credit report shows a poor history of paying bills, the utility company might say you have to pay a deposit to get new service, costing you more money. Or they might ask you to get a letter of guarantor from someone who agrees to pay your bill if you don’t. 

How Employers Use Credit Scores 

When an employer requests your credit report as a part of the job application process. The  credit bureaus will only send over a variation of your credit report meant specifically for employers. This means that they will not be able to see your credit score.Potential employers use your credit report to make hiring decisions.

Note that prospective employers check your credit report versus your credit score. They must also have your written permission before checking your credit report.​

Your Credit Score and Your Net Worth 

Net worth is simply a phrase referring to the total amount of money you have minus your debts.

A high net worth gives you better flexibility and provides you a safety net of cash, investments and property valued high enough to cover your living expenses.

Though your credit score does not directly affect your next worth, having an excellent credit score qualifies you for the best interest rates when you apply for financial products. This is important when you want to borrow money affordably, which most of us want to do at some point or another.

Having a good credit score can help you build your net worth in the following ways:

• Ability to add to your assets: buying a house or car.
• Ability to get funding to launch a business. 
• Savings on large loans, like a mortgage, personal loan, auto loan, or small business loan. 
• Ability to leverage credit cards with better limits, rates, and rewards. 

How to Improve Your Credit Score 

Your credit score is one of the most important measures of your financial health and knowing what makes up your credit scores can help you improve and protect it. The better your score, the easier you will find it to be approved for new loans or new lines of credit. credit score, But how can you improve a low credit score?

Here are some tips to help you boost your score:

Work on Your Payment History

Impact on your score: 35%

As you can see, your payment history has the biggest impact on your credit score. Because it's such an important component, late or missed payments can have a significant overall impact on your score. If you paid your bill responsibly and on time, it works in your favor.

So a simple way to raise your credit score is to avoid late payments at all costs. Some tips for doing that include:

• Setting due-date alerts, so you know when a bill is coming up
• Automating bill payments from your bank account

Watch Your Credit Utilization

Impact on your score: 30%

This is the second most important factor in FICO Score calculations.Your credit utilization rate is the amount of revolving credit you're using divided by your total available credit across those accounts. Having available credit indicates that you're only using the credit that you need, which may be a positive sign for lenders.

Keep Your Oldest Accounts Open

Impact on your score: 15%

The older your average credit age, the more favorably you appear to lenders. Lenders generally want to see established lines of credit. This means that you should keep credit accounts open because closing them could shorten the overall length of your credit history.

Build a Credit Mix

Impact on your score: 10%

Having a credit mix refers to your variety of account types, including credit cards, student loans and mortgages. Maintaining variety, along with a solid payment history, can suggest to lenders that you understand the fundamentals of credit.

Only Apply for Credit When You Need It 

Impact on your score: 10%

Every time you apply for a new line of credit, a hard inquiry is pulled on your report. Frequent hard inquiries can negatively impact your credit score and may suggest to lenders that you are trying to take out more credit than you could reasonably repay.

Final Word

Your credit score is not the only factor that impacts your financial situation, but it is an important one. Your credit scores can impact your ability to qualify for financing and affect the types of rates and terms you may get. Now that you know the answer to ‘how your credit score impacts your finances,' it's a good idea to find out what yours is and improve it if necessary. Note that the amount of time it takes to improve a damaged credit score varies depending on your circumstances and your overall financial goals, but it will likely require a bit of patience and won't happen right away.