What Is a Credit Score and Why Is It So Important?
Posted on 12/15/2015
What’s a Good Credit Score?
A good credit score is crucial to financial success. A credit score is a three digit number calculate from your data credit report andis one factor used by lenders and financial institutions to determine your credit worthiness for a car, student loan, mortgage and credit cards.
It is a number that indicates to lenders and creditors how likely you are able to pay back the debt you owe, based on your past borrowing behavior. The most widely known type of score is a FICO score. FICO is short for Fair Isaac Corporation and is considered by many to be the most accurate. The three major credit reporting agencies, Equifax, TransUnion and Experian also calculate credit scores based on their own statistical model.
But how do you know what a good score is and what a bad score is? Well, that’s sort of a gray area since different scores are calculated in different ways; different creditors use different scores; and no one knows exactly how they are calculated since those formulas are proprietary to the companies using them. Scores may range from around 300 to 900 with the average credit score in America being at about 740. Here is an approximate range of how credit scores are judged:
Excellent credit = 720 and above, Good credit = 660 to 719, Fair credit = 620 to 659, Poor/bad credit = 619 and below
The higher your score, the more likely you are, in their eyes, that you will pay back the money you borrow.
Your credit score is used to determine whether you can get credit for things like: a credit card, a loan to finance your college tuition, a loan to buy a house or car, or even to start up a new business. Not only that, it is used to determine what kind of loan you qualify for, how much credit you qualify for and what your interest rate will be.
If you’re a college student, you’re probably working hard to keep your grade-point average looking sharp. After all, your GPA could be your ticket to graduate school, a competitive internship or maybe even your dream job.
But if you’re hitting the books so hard that you’re ignoring another important number – your credit score – you could be making a huge mistake. It might be hard to believe, but your three-digit credit score is actually more important than your GPA. Not sure why?
Below are the five reasons.
- It determines the cost of future purchases. It’s true that your GPA could determine certain aspects of your future, but your credit score is guaranteed to influence one thing – the cost of the big purchases you’re going to make after graduation. Lenders and insurance agents (among others) look at your credit score when they’re figuring out how to price the products they’re selling you. For instance, when you apply for your first car loan, the bank you’re working with will run a credit check to decide how much to charge you in interest on the auto note. A low credit score will mean paying a much higher interest rate. This, of course, will make the cost of the loan higher overall. A high GPA might open the door to academic opportunities, but a high credit score will keep more cash in your wallet. This is much more important once you’ve left school behind.
- It’s almost impossible to put a bad score behind you. When you’re an undergraduate student, it’s hard to think about much else beyond your four years in school. But there is a wide world out there beyond your bachelor’s degree, and within a few years of graduation, your GPA loses a lot of its importance. Pretty soon, potential employers will be much more interested in your past job performance than how you did in your freshman English course. But your credit score will follow you everywhere you go for the rest of your adult life. Since it’s checked under so many circumstances, there’s no point in time when it will stop mattering the way your GPA probably will. You’ll need it, and need it to be good, for as long as you’re participating in the financial system.
- Once your score goes south, it takes longer to improve. A bad semester could have a negative impact on your GPA, which is certainly stressful. But it’s relatively easy to revive your average the following term if you buckle down and study hard. In other words, a few bad moves can be corrected pretty quickly. Not so with your credit score. Messing up just once could result in a serious loss of points that will take a long time to correct. For instance, if you don’t pay a bill and it goes into collections, you’ll lose a lot of points from your credit score – perhaps as many as 100. But there’s no extra credit or big exam to ace that will help you get these points back quickly. You’ll have to demonstrate years of positive payment history to get your score back to good form. We’re certainly not suggesting you should take your GPA lightly, but it’s important to remember that your credit score is less forgiving – this is why prioritizing it is a smart long-term move.
- It will influence your ability to find a place to live. When it comes to basic human needs, shelter is at the top of the list. Your GPA isn’t going to be very helpful when it comes to finding a decent place to live, but a good credit score certainly will be. This is because most landlords will check your credit score as part of the rental application process, and many simply won’t accept tenants with bad scores. Of course, the same is true if you’re thinking of buying a home. If you don’t have good credit, qualifying for a mortgage will be nearly impossible. So no matter what, building and maintaining good credit will affect your ability to find housing. This reality alone should convince you that it’s at least a little more important than your grades.
- It could put a crimp in your romantic relationships. It might seem strange, but your credit score could have an impact on your dating life. According to a 2014 NerdWallet analysis, more than half of single adults over age 25 are “somewhat less likely” or “much less likely” to date someone with bad credit. Unless you’re habitually dating pretentious people, it’s highly unlikely that your GPA will be considered a deal breaker by potential mates. But most young adults realize that a significant other with bad credit might come with financial baggage and don’t want to get serious with someone who might hold them back. So once again, credit score trumps GPA in terms of long-term importance.
Final words of advice:
Here are a few tips on how to improve your credit score
- Pay your bills on time.
- Avoid credit card debt, and avoid maxing out a credit card.
- Start establishing a credit history as soon as you can. The easiest way to do this is by getting a credit card early and using it responsibly.
- Don’t apply for too much credit at once.
- Check your credit reports at least once per year. if you spot a mistake, have it corrected as soon as you can.
Following above these tips, is a ticket to a bright future academically and financially, of course!
If you need customized advice on how to build and maintain a good credit, please contact one of our knowledgeable personal finance experts at www.asktutelage.com