April is Financial Literacy Month, which means there is no better time to ensure you understand the ins and outs of one of the most important parts of your finances, your credit score. You may know some of the obvious uses – like applying for credit cards and loans. But did you know 90% of insurers (auto, home, etc) use your credit score to help decide if they’ll cover you and what premiums to charge? And that your credit score is often used when you want to rent an apartment, set up utilities, buy a cell phone, even apply for a job? Did you know that 20% of credit users find errors on their credit reports? For all of these reasons and more, it’s important to understand your credit score and actively monitor your credit reports (they’re not the same thing!).
Let’s start with what impacts your credit score: payment history (35%), credit utilization (30%), length of credit history (15%), types of credit (10%) and new credit inquiries (10%). As you can see, payment history and credit utilization together make up 65% of your score. If you want to improve your score quickly there are two things that will make the biggest impact. First, make all your payments on time and in full every month. Second, keep your utilization (how much of your available credit you are using) below 30%. This shows creditors that you are responsible and more likely to repay your debts.
Let’s walk through an example of how your credit score impacts what rate you get on a mortgage loan. Remember, the higher your score, the better your rate.
As you can see, interest rates make a big difference and it works the same for car loans, credit cards, personal loans, etc. Good credit management can lead to a higher credit score, saving you money when you borrow money for a house, car, or just everyday shopping.
Finally, don’t assume your credit report is 100% accurate. You can be doing everything right, but an error on your report could be quietly bringing your score down. Make it a habit to review your credit report at least annually. You can read more here about the breakdown of your credit score and how to get your free credit reports.