Why Are They Keeping An Eye On Your Credit Score?
Each of these companies has its own very different reason for watching your credit. Lenders view your credit score to see how much of a risk you are as an investment. If you have a good credit score, they will view you as less of a risk to lend money to, and you will get a lower interest rate. On the other hand, if you have a low credit score, they will be more cautious and fearful about getting their debt paid back. As a result, they’ll give you a higher interest rate. Similarly, employers will look at your credit score to see how well you manage your life outside of work.
Landlords will look at your credit score to see how likely it is that you will pay your rent on time, and if you have a low credit score, Cell Phone Carriers might force you to sign a pre-paid contract in order to get a cell phone from them. Your credit score is determined by the items in your credit report. Each year you can access a free credit report to ensure that there are no mistakes.
The True Cost of Your Credit Score
Your credit score is a very important number to you for many reasons, but most importantly, it affects how much you pay for something in the long-run. The difference in interest paid between two interest rates can be staggering. As little as a 1% difference in interest rates can create a difference in dollars paid in the tens of thousands of dollars. For example, a 6.2% interest rate and a 7.3% interest rate have a difference of just 1.1%. However, on a $250,000 home, that 1.1% difference amounts to $182 per month, or more than $20,000 in a 10-year span. For a car loan, those same interest rates would amount to a difference of approximately $1,300 over a three year span. You can see how different interest rates can affect you by using loan calculator tools such as a car loan calculator and loan mortgage calculator.
As you can see, having a high credit score is essential to saving money when making both large and small purchases.
How Can You Boost Your Credit Score?
Understanding how your credit score is determined can help you manage your debts in the best possible way.
- Pay on time. 35% of your credit score is based on your payment history.
- Do not max out credit cards. 30% of your credit score is based on the total amount of debt you owe in comparison to the total amount of debt you can possibly owe. This is called the “credit utilization” ratio, and the lower your debt, the better your ratio.
- Keep accounts open. 15% of your credit score depends on how long you have had all of your accounts open. They look at each account and take the average length your accounts have been open. The longer they have been open, the better. Having older accounts shows them that you have managed your debt well.
- Open accounts as infrequently as possible. 10% of your credit score depends on how many accounts you recently opened. Having recently opened credit card accounts makes lenders worry that you did so to pay off other debts or go on a spending spree. Also, recently opened accounts lower your average length of accounts.
Handle the right credit. 10% of your credit score is dependent upon your revolving credit history. Your credit card payment history carries more weight than fixed payment debt, such as mortgage loans and car loans, because it shows that you control how much you pay off each month.