Your credit history sums up all the information in your credit report. This information includes balances due, credit accounts, and payment history details. Your credit report also contains information on overdue debt, foreclosures, bankruptcies, judgments, and liens. Three reporting agencies—TransUnion, Experian, and Equifax—compile and update your data regularly.
Each time you apply for a line of credit or loan, the application authorizes the lender to obtain a copy of your credit report.
Often, credit reports run up to many pages. Not everyone has a credit report. You need to build a credit history to establish one. Without a credit history, there is no way for lenders to verify eligibility for loans, rentals, jobs, and insurance policies.
On the other hand, your credit score is the number calculated from your credit history and credit report information. Otherwise known as a FICO score, a credit score is a decision-making tool for lenders to determine creditworthiness. It comes in several versions, with specialty scores for products like credit cards or auto loans.
As crucial evaluation tools for lenders and institutions, your credit history and credit score wield more power over your life than you might realize. Often overlooked and underestimated, credit histories and credit scores make or break opportunities in everyday life.
Credit Score: The Number That Shapes Your Monetary Life
Your credit score—derived from your credit report and history—is equivalent to your financial DNA.
Significant determinants of your credit score encompass the age of your credit accounts and the ratio between your owed balance and credit limits, defined as the credit utilization ratio.
It would also include the number of times you’ve applied for credit or your “hard inquiries,” your repayment history and record of derogatory marks for late payments and defaults, and the types of credit in your report.
Credit scores fluctuate throughout one’s life and depend on account activity. FICO scores range from 300 to 850. VantageScore, FICO’s competitor, also has its own, albeit similar, scoring model. Generally, FICO scores above 690 are favorable and labeled “good,” while those above 720 are considered “excellent.”The higher the score, the better for your credit.
How Credit History Impacts Your Everyday Activities
As your financial DNA, your credit history and resulting credit score are more than just financial data and statistics—they can decide the interest rates you’ll be offered on various loans and the credit limits you can access.
The following is a list of ways your credit history dictates many aspects of your life and why credit tracking is vital to keep it within acceptable bounds.
Career: Landing that dream job
Credit scores directly affect your professional life. Employers may include credit checks in their hiring process. Positions that handle sensitive financial information and money are likely to utilize credit checks as employers may deem the information crucial to prevent theft and fraud. Not all companies or US states practice this, however. Even then, there’s a possibility that your credit score becomes a factor in getting that dream job.
Car loan affordability
Your credit score affects the affordability of your next car. Lenders use it to calculate the interest rate they give you. Higher scores often give rise to lower monthly payments, while lower scores result in high-interest loans. Better scores ultimately save you a considerable amount of money over the life of the loan. Unfortunately, poor credit scores mean your dream car could be less affordable.
It’s important to note that credit-based insurance scores in the auto industry differ from the usual credit scores people are familiar with, like VantageScore and FICO scores. Credit-based insurance scores are designed to accurately predict the changes a consumer will file insurance claims that will cost the car company more money than it collects in premiums.
While auto companies do consider your credit history, they weigh your credit alongside the credit-based insurance score and other factors like demographics, location, driving record, and vehicle type. They also consider the car insurance you want, including deductibles and coverage amounts. Car companies are prohibited from deciding on your loan solely based on your credit standing.
There are exceptions to this rule, however. With auto loans and insurance, location matters. California, Washington, Hawaii, Massachusetts, Michigan, and other US states prohibit or strictly limit insurance companies’ power to use your credit information in determining your auto insurance rates. If you buy a car in these American states, your credit score won’t affect your auto insurance rates, regardless of how bad.
Utility bills
If you think utility bills and credit history aren’t connected, think again. Ordinary utility payments for gas, electricity, or water may require a credit check. Utility providers can offer higher security deposits to those with lower credit scores. Hence, you’ll pay more money upfront to access essential services.
Rental property rate and location
Those who rent their dwelling may undergo extensive credit checks. If you’re on the hunt for a rental property, your prospective landlord or property management company will likely run a credit check to ensure you are capable of timely rent payments and are a reliable tenant.
Poor credit scores may lead to stricter or less favorable terms, such as co-signer requirements and higher security deposits. Poor scores may also result in outright denial of a lease.
Because they affect the terms of your lease, your current credit score and credit history affect your rental options and, thus, the quality and location of your neighborhood.
Mortgage affordability
If you’re going the homeownership route, keep a tight watch on your credit. Mortgage lenders review your credit history and scores from the three major credit bureaus as a standard step in the application process. As mortgage loans are usually much larger than student or auto loans, expect a more stringent review process.
The qualifying credit score for a mortgage varies by loan type, the outlook of the housing and credit market, and the lender. However, the general rule is higher credit scores merit better chances of approval. Moreover, higher scores also generally attain lower mortgage interest rates.
Even a tiny change in your mortgage interest rate can significantly impact the cost of your home purchase. A seemingly innocuous 1% increase can result in tens of thousands more in cost over the life of the loan.
When you apply for a typical 30-year fixed-rate mortgage, even a fraction of 1% can add up. Thus, low credit scores generally result in a more expensive home. To get favorable terms on a loan, you must tick all the boxes—good credit, sufficient assets, and income.
Where mortgages are concerned, a credit score above 700 will land a borrower a favorable interest rate. However, your score should be 740 or higher to aim for excellent credit. Credit scores between 630 and 699 are in the range of fair credit. Scores of 629 and below are considered poor credit.
Insurance rates
We all need to get insurance on a residence or a car. This aspect of everyday life is not immune to the effects of credit history. Insurance companies might utilize a credit-based insurance score to evaluate an applicant’s risk profile rather than relying on a conventional credit score.
Whatever type of insurance you’re applying for, a poor history or low credit score may result in higher premiums. It will be a more significant burden to pay such premiums. Therefore, to save on insurance costs, it is crucial to maintain good credit.
Mobile phone plans
Something as mundane as a mobile phone plan may still depend on your credit history and credit score. Telecom companies and mobile service providers conduct standard credit checks to qualify you for a mobile phone plan. This practice protects service providers against the possibility of defaults on monthly bills.
Those applying for expensive phone models and plans may undergo more scrutiny. Like utility companies, mobile service providers and telecoms may ask you to pay a deposit if they deem your credit history insufficient.
Credit card applications
Credit card issuers review your credit history and score to determine whether to accept your application and the terms you receive. Issuers and card types vary their credit qualifications. However, cards with low APRs and rewards points require higher credit scores.
Fortunately, there is a wide range of credit cards for every level of credit—some banks issue cards for those with no credit history. Secured credit cards are the default option for applicants with bad or no credit.
While your current credit score will impact your credit card application, remember that the credit card application itself also affects your credit score.
When a card issuer pulls your credit after receiving your application, your score may decrease by five points or less. This impact is temporary, however. A “hard pull” or “hard inquiry” can stay for approximately two years on your credit report. Its impact on your credit score tapers off after a year.
Too many credit card applications submitted within a short period can significantly drop your credit score or cause a loss of good credit standing. When timed alongside a mortgage application, hard inquiries from new credit card applications may give your lender the impression that you could overextend yourself or go on a spending spree.
Your marriage and relationships
Tying the knot means a consolidation of finances. While this does not mean that your credit score directly affects that of your spouse, your joint financial activities, such as applying for credit cards or a mortgage, may factor in both your scores.
The spouse or partner with the lower credit score could impact the interest rates and terms of the mortgage. This situation means a more expensive loan for you and your spouse.
Financial habits and opportunities
A low credit score, which may result from high credit card balances, late payments, or collections, will make it more challenging to secure affordable credit. Lack of access to cheap credit could deprive you of investment opportunities and positive changes to your life that improve your income.
Low credit scores generally force people to borrow at higher interest rates, leading to a cycle of debt and making it challenging to dig their way out of financial hardship.
Poor credit comes at a high price. Two people with vastly different credit scores could secure the same loan at divergent interest rates. While the one with excellent credit could get approved for 3%, for example, the other with poor credit could attain the same loan at 10%.
This difference results in a wide gap in monthly payments, adding up to thousands in a few years. This example demonstrates the tangible impact of credit scores on one’s financial well-being and life trajectory.
How To Start Rebuilding Your Credit Score
Now that you understand the impact of your credit score on your everyday life, it’s essential to know how to improve, repair, and rebuild it if necessary. Those with low credit scores are not powerless to change their financial status. The following are steps you can take to improve your financial future.
Check your current credit report
Information is crucial. Start with a credit report check. Obtain a copy of your credit report from the three major credit bureaus in the US (TransUnion, Experian, and Equifax).
Review your credit report for discrepancies, errors, or even accounts that don’t belong to you. Identity theft is rampant in the credit industry, so be diligent. Next, dispute any inaccuracies you discover. This action could go a long way in improving your existing credit score.
Don’t open too many new accounts
As mentioned earlier, a credit application prompts a hard inquiry into your credit report, resulting in a few points off your credit score. When you simultaneously open several new accounts within a short period, these applications could damage your score.
Those who have a brief credit history will be impacted the most. Minimize simultaneous credit applications, choose accounts wisely, and only apply for credit when necessary.
Diversify your credit mix.
Diversity can improve your credit score. A diverse mix of credit accounts, including installment loans, mortgages, and credit cards, may positively impact your score, provided each is judiciously timed and responsibly managed.
However, don’t diversify for its own sake. Choose the types of credit you take on based on your needs and your overarching financial goals. Be careful that you don’t overextend your credit.
Pay bills on time.
Payment history is one of the most significant factors influencing your credit score. Late payments on your debts can remain on your credit report for up to seven years. Timely payment of your bills is critical to improving your credit history and credit score.
To ensure timely payments, use technology to your advantage. Set up digital tools to help you with payment automation, budget creation, and reminders.
Catch up on past-due accounts
If you need to catch up on your bills, do your best to bring them current. Having all your accounts current helps your scores. It also prevents further late payments from being added to your credit history and stops late fees.
In addition, talking to a credit counselor may help. Credit counselors may assist you in negotiating lower interest rates and payments, helping you bring your accounts current faster.
Pay down your revolving account balances
If you are on time with your bills, check for revolving account balances next. High balances on revolving credit accounts lead to increased credit utilization rates, thus hurting your credit scores.
Your revolving accounts include lines of credit and credit cards. When you keep a low balance on them versus their credit limits, you help boost your credit score.
Your credit utilization is the amount of credit you use at a given time. The target percentage limit to keep you in good credit is 30% of your available credit. Those maintaining excellent credit scores tend to have a low credit utilization ratio—usually in the single digits.
Be patient and consistent
There is no fixed timeline for repairing and rebuilding credit. The rate at which you increase your credit score depends on the factors hurting your credit and how strategic you are at fixing it. For instance, a single missed payment takes less time to fix.
You need to bring your account current and continue to make on-time payments. However, missing payments on multiple accounts and taking an extended period to catch up will mean your credit score will take longer to repair. Repossessions and foreclosures result in more significant damage to your credit score and thus extend the recovery period.
You should keep sight of your goal despite multiple factors dragging your credit down. Negative marks will diminish if you adopt responsible financial habits and consistently repay your loans.
Most negative marks are expected to fall off your credit report after seven years. They will stop affecting your scores at that point. Chapter 7 bankruptcies are among the exceptions. They can stay on your report for up to 10 years.
Avoid credit repair companies or individuals that offer quick fixes for a fee. Be wary of debt settlement companies that offer to try and “settle” your debt payments by encouraging you to freeze your payments temporarily as a means to negotiate.
Such moves may result in more significant harm to your credit score and may be ineffective. When it comes to resolving credit issues, persistence and time are essential.
Proactively Boost Your Credit Score to Improve Quality of Life
Your credit score is not just a number. It reflects your credit history and level of financial responsibility. Thus, you can view it as a gatekeeper to many aspects of your life—personal, economic, and professional. Your credit score impacts your access to affordable loan opportunities, asset purchases, insurance, and other vital parts of your life, so you must track and manage it consistently.
A low credit score can lead to a poor quality of life, resulting in higher interest payments, unaffordable mortgages, and restricted opportunities on multiple fronts. To rebuild a low credit score, you must understand its impact on your life and take proactive steps to correct the factors damaging your credit as soon as possible.
Your ultimate goal should be to build a strong credit profile and use it to create a solid foundation for your financial success. So much of your success depends on this three-digit number. By proactively building and boosting your credit score, you create the underpinnings of a better financial future.
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