Credit Scores and Impacts

When you take out a car loan, get a credit card, or buy a house you are using credit. When you use credit, details of that loan and your payments are recorded onto your credit report.  Credit Reports provide bankers and other lenders or creditors with information to see if you are responsible with money and that you repay your debts.  There are companies out there that grade your Credit Report and assign you a Credit Score.  A Credit score is a statistical number based off of your credit history. The score ranges from 300, the lowest and worst score, to an 850 which is a perfect score. Attaining a good credit score is an important goal in life.  While it can be easy to damage your credit score, but a little education can go a long way in preventing those mistakes working towards an excellent score.

Payment history accounts 35% of your credit score.  Any late payments or missed payments that show up on your credit report automatically reduce your credit score. The more late payments and the longer past due they are, the worse impact it will have on your score.  Any balances that have gone more than 90-120 days past due can be sent to a collections agency, which can have the most drastic impact on your score.  Who wants to lend money to someone who has a bunch of unpaid debts and bills?  

The second biggest component of your credit score is  the Amounts Owed, which accounts for 30% of your score.  Your credit cards play a major role in this category.  Once you get a credit card you are given a credit limit. You only have so much money you can spend on a credit card. You want to control your spending and make sure you are not using too high of a percentage of your limit.  This is called Utilization.  For instance, if you only have a limit of $1,000 on a card and your balance is less than $250, you have used less than 25% of that limit you are doing well with your spending habits. Above 50% Utilization is when your credit score starts to be affected negatively. . People who “max out” theirs by spending all of their limit can expect their credit score to take a significant hit.   

The remainder of your credit score is based on how many loans you have and how long you’ve had them.  The length of your credit history, or “credit age” counts for 15% of your score.  The longer your history the better, so getting a credit card when you are young does have its benefits (as long as you are smart with it).  Your credit mix accounts for 10% of your score, and is an overall look at the types of loans you have.  People with good scores tend to have a variety of loans, such as credit cards, auto loans, and maybe a mortgage on their report.   Having nothing but a handful of credit cards won’t help you much in this part, and having too many cards can be bad.  Lastly new credit, which is 10% of your score, is looking at how many new loans or credit inquiries there have been in the past year.    Opening up four or five new credit accounts in the past year shows you might be getting in over your head or not taking out loans for the right reasons.  
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Now that you know the different factors of what affects your credit score you need to know how you credit score can impact your life. If you have a bad credit score, which would be anything below a 600, it can create some major burdens.  With a bad credit score you have a higher chance of being denied for new loans. Meaning if you went to get a new credit card or buy a car, it is likely you would not be approved. This leads many people to seek out alternative loans, like title loans and payday loans. These loans are much more risky and can charge extreme interest rates and are all together not good ways of borrowing money. Other than lenders, many other people might look at your credit score. Car insurance companies, landlords, and employers all may look at your credit score. When you take out car insurance with a poor credit score your rate could be higher than somebody who has a strong credit score. When trying to get a apartment or house to rent, landlords can deny you due to a bad credit score.  A poor credit score can even impact your ability to get hired, if the employer  you are applying with will look at your credit score as part of your application process.

Credit Scores are really just a reflection of responsibility.   If you’ve been smart with your loans, made your payments on time, and showed some patience and discipline, chances are your score is just fine.  But when you do make mistakes, it can take a lot of time to build your credit score back up.  And living with a low credit score can have some big impacts on your life.  So be smart when borrowing, and pay back your debts!

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