Why your credit score matters

Whether you plan to make a big purchase soon or get a loan in the future, now is the time to think about and understand your credit score. Many people, especially those who have had a limited need for loans, may not think about their credit score and don’t realize they should consider it — until a time comes when they need to have good credit.

The time to think about your credit score is now, when you can make positive lifestyle choices to build up your score in preparation for landing a loan.

Why is a credit score important?

A credit score is a number that lenders use to determine a person’s creditworthiness. A person with an excellent credit score may receive loans, such as a car loan, with better interest rates than someone with a lower credit score. There are other factors that influence rate as well, including the type of collateral you use to secure the loan and the loan-to-value ratio determined in your application. Having a lower interest rate means you pay less over the life of the loan. In addition, someone with no credit or a poor credit rating might be denied a loan because of their low — or lack of — credit score.

Credit scores are used in other ways, too. Some property managers and landlords perform credit checks on applicants to help determine whether to rent an apartment or house to them, because the score can indicate the renters' likelihood of making on-time payments. People with lower credit ratings may also have to pay higher security deposits to rent homes, and this serves as an incentive to make timely payments.

Utility companies can look at new customers' credit scores; if they discover poor payment history, they too may request that the customer pays a higher deposit. And while employers can’t gain access to your credit score, they can ask for access to your credit report to see if it contains negative marks.

Those who are newer to the workforce and those who need to rent an apartment or buy a vehicle for the first time will want to ensure their credit score is the best it can be.

What is a good credit score?

There is no magic number for a good credit score. Generally speaking, to get the best interest rates, people should have a score in the 750+ range; a score of 700-749 is also considered good. Fair credit is usually defined as ranging between 650 and 659. Credit or loan applicants with "poor" credit scores might not receive credit approval at all based on their scores alone.

What affects your credit score?

While each of the three major national credit-reporting agencies has its own algorithm to determine credit scores, they all rely on much of the same data, including:

• History of on-time payments
• Percentage of available credit used
• Number of credit sources with balances
• Length of credit history
• Types of credit used (which may include revolving, mortgage, consumer finance and installment)
• Number of credit inquiries

Each of the above six factors impacts your credit score differently. While your payment history accounts for 35% of your FICO score, the length of your credit history only impacts 15% of your score. Your credit utilization impacts 30% of your score, and your credit mix and the age of your credit accounts each count for 10%. [1]

When it comes to raising your score, these factors can tell you where to get started to see a boost. Begin working on improving the factors that are more highly weighted when possible. If you have missed credit card or loan payments, for example, beginning to consistently pay them on time can improve your score.

It’s important that those who are newer to the credit scene understand how credit scores work, and why a good credit score is something to strive for. Taking your credit score seriously can save you money, both for the short and the long term.

[1] myFICO "What's in my FICO® scores? (Accessed March 2021).