Frequently asked financial questions are questions that I’ve seen pop up over and over again. I thought I’d take the time to answer them in this new Series. So each post will have a short quick answer to these frequently asked financial questions followed by a longer more detailed answer.
How Important is My Credit Score?
Pretty damn important if you ever want to borrow money or open up a line of credit. If you’re already rich and can pay for everything in cash, your credit score may not be so important.
Lenders use your credit score to determine if you are someone likely to repay money that you borrow. Basically, they use your credit score to determine your creditworthiness. If you have a low credit score you may not be able to get the line of credit you need, be it a car loan, mortgage, personal loan, or new credit card.
Your credit score ranges from 300-850. The higher your score, the better. Ideally, you want a score above 700 since your credit score can also determine the interest rates offered to you. The better the interest rate, the less you have to pay the bank for the privilege of borrowing the money.
Almost everyone will at some point need to open a line of credit. It could be as simple as trying to get a specific credit card to travel hack and take advantage of bonus miles offered. Or a bigger decision like buying a car, home, or refinancing a loan, like private student loans.
How to Find Out & Read Your Credit Score
You can get the most commonly used credit score, the FICO score from several places. One of your current credit cards may offer you your free credit score. Alternatively, you can use sites like Credit Sesame or Credit Karma to get a free credit report card that shows your credit score and what areas you need to improve to raise your score. Your credit score looks at several things including, your credit utilization, types of credit, payment history, the average age of credit, and credit inquiries. Since some of these factors matter more than others, you can target what to work on to see your credit score drastically improve.
What is a Good Credit Score?
Ideally, you want a score above 700. Though 750 is even better and anything above 800 is rockstar credit score status. Anything lower than 650 will make life a little harder and more expensive. The higher your score, the better interest rate you will be offered on any line of credit. The lower the interest rate, the less money you pay to borrow the money.
If you already have an older loan or line of credit, you can also use your stellar credit score to shop around for a new loan with a better rate. You can refinance, or in the case of credit cards do a balance transfer to save on interest.
Related: Is a Credit Score of 740 good?
What Can I Do to Increase My Credit Score?
Credit utilization has a big impact on your credit score. It is the amount of your credit line you are using. For example, if you have a credit card with a limit of $10,000 and you have a balance of $9,000 then you have a 90% credit utilization.
The lower you can get your credit utilization the higher your credit score will be. Ideally, you want your credit utilization below 10% but at the very least below 30%.
There are two ways to decrease your credit utilization, the first is to lower your balance by paying off debt. The second is to increase the amount of credit available to you. You can do this by either opening another credit card (and not running up the balance) or getting a credit line increase on your current line of credit (credit card).
Keep in mind that opening a new card or extending the line of credit could also impact your number of credit inquiries and/or the average age of credit.
The other biggest thing you can do to help increase your credit score is to make sure you pay all your bills on time. Even if you were late with a payment a few years ago, making on-time payments now will make that one late payment matter less.
Wrapping it Up with a Bow on Top
Your credit score is important if you ever want to borrow money. Having a higher credit score (somewhere above 700) will meant lower interest rates offered on any loans you need. You can use tools like Credit Karma, Credit Sesame, or MyFico to find out your credit score. If you have a lower credit score there are a few things you can do to help raise your score. To increase your credit score:
- Lower your overall credit utilization by either paying down debt or requesting an increase in your credit line
- Make all your bill payments on time
Read more from the Frequently Asked Financial Questions Series.