The Importance of a Credit Score

Your credit score is very important to you as well as to the lenders and credit card companies that lend money to you. Your credit report is a record of your payment history on credit received from lenders and credit cards. Your score can change, depending upon how your history with credit changes. Your credit score determines whether you get a loan as well as the rate that you will pay on the loan.

The credit score plays a big part in your approval for a loan and the interest rate you qualify for a loan. For example, you can save yourself $2,767.00 on a $25,000.00 auto loan that is paid over 48 months with an interest rate of 4.00% compared to 9.00%. A person with a higher credit score will qualify for a lower interest rate on their loan.

Along with the rates and terms that you qualify for a loan, there are other businesses that use your credit score in their business decisions. Insurance companies use it to set premiums on homeowners and auto insurance coverage.

Cell phone companies use credit scores on rates offered on cell phone plans. Landlords use credit scores to decide who gets to rent their apartments. Utility companies use credit scores to determine the size of the deposit for hookups.

What you pay for rent, cell phones, utilities, and loans will affect your budget. With a good credit score, you can reduce your family's living expenses. Knowledge and planning can help you to take control of your money to help preserve your credit score.

For a quick review, a good credit score would range from 700-749 points. A very good to excellent score would range from 750 to 825. A credit score below 700 does not mean you will not get a loan, but you may not get the same rates and terms as an individual who has a credit score greater than 750.

What affects my credit score?

• Payment history
  • Pay your loans and credit cards on time. Set up automatic payments out of your checking account. If you have a credit card, pay your bill as soon as you receive it. Go online with the credit card company, and set up your payment and the date you want to make the payment. You can also utilize Bill Pay through your online banking to manage your credit card payments.

    The best practice would be to pay the credit card bill in full.

• The ratio of the amount of debt to available credit
  
  • If you have a credit card that has a credit limit of $10,000.00 and you have a balance of $8,500.00, that will negatively impact your credit score. Work to keep your credit card balances below 30% of your credit limit.
• Length of credit history
  • New loans or credit cards can negatively impact your credit score. As the loan is seasoned and you show that you make payments on time, your credit score will improve. This should only affect your score for a short period of time. It would not be a good idea to finance a car purchase and open a new credit card prior to requesting to finance a house purchase.

There are six ways to build your credit score.

1. Borrow only what you can afford to repay. You don’t want to spend over 38% of your gross income on debt payments each month. That includes your house, credit cards, auto loans, and student loans.
2. Make all your payments on time, every time.
3. Pay your credit card balances in full.
4. Keep track of what you charge on your cards, so you don’t have a big surprise when the credit card bill arrives. People spend more when they use a credit card because they don’t feel any “financial” pain.
5. If you carry a balance on your credit card, pay more than the minimum payment and make a plan to pay the balance off as quickly as possible.
6. Use less than 30% of the available credit on credit cards.

Your credit score not only affects the rates and terms for loans at a financial institution, but your credit score also affects rates and terms for insurance premiums, rent, cell phone plans, and deposits required by utility companies. Plan and budget for your family's living expenses.

Always pay attention to your financial situation. A bad financial decision could adversely affect your credit score and put more pressure on your income. Be responsible and wise with credit and you will have a strong credit score.

For more information, read How To Budget and How to Improve your Credit Score for more helpful tips.

David Lantz - Senior Vice President
davidl@frontierbank.com