How Three Digits Dictate Your Financial Path

These days many numbers dictate how we feel about the world around us, but there is one number that has the greatest influence on the freedoms we are granted inside that world—our credit score.

How Is a Credit Score Determined?

Few numbers in life affect us as much as the almighty credit score, three digits compiled from an individual’s borrowing history, current credit usage, credit mix, and additional factors. For Americans, three main companies report credit scores: Experian, Equifax, and TransUnion. Each of these companies sifts through an individual’s credit history, then returns a number ranging between 300 and 850. The higher the number, the better the score. Your number helps lenders determine how likely you are to repay your loan on time and in full.

What Is an Acceptable Credit Score?

Credit scores can be confusing as there are two different scales: FICO and VantageScore. A “fair” rating on one may qualify as a “good” rating on the other, so be sure to understand which model you are referencing when reviewing your credit report. Though a credit score of 700 is a solid place to start, scores of 800 or higher reflect excellent credit and borrowing power. Scores below that desirable 700 range are considered “good” to “fair,” and though you may get a stamp of approval, it will likely come with a higher interest rate. However, those with credit scores falling below 600 may find it difficult to borrow from most lenders.

Why Is My Credit Score So Important?

Your credit score dictates your financial freedom in many ways. The rates offered directly relate to your current credit standing, from insurance to car loans to mortgages. The higher the credit score, the lower the interest rate and the more manageable the overall costs will be. With evolving technology and many retailers going cashless, access to credit cards has become necessary, and folks with a limited or poor credit history may find it increasingly difficult to get by without one.

If you’re dreaming of buying your own home, that credit score might just be the ticket that gets you from hopeful to homeowner. When contemplating a large purchase like a house, which often holds a term of 15 to 30 years, your credit score will help determine the parameters of your mortgage. Even a slight increase in interest rates due to questionable credit equates to thousands of dollars over the life of the loan. Borrowers with lower credit scores may not be able to cover the increased monthly costs when high interest rates and insurance fees apply.

How Much Does My Partner’s Score Matter?

If you have a co-borrower, the importance of your partner’s credit score depends on if you plan to make large purchases together. Couples hoping to invest in something as costly as a house will need to consider the risks and rewards, as lenders do not typically average co-borrowers' scores. Instead, the lowest middle score is utilized. For example, three credit scores are pulled for each borrower through the main reporting companies, and the middle score for the applicant with the lowest credit tends to be what loan officers utilize. For this reason, if your co-borrower has a notably lesser credit score, you may consider leaving them off the application, providing your income alone will suffice to secure lending.

What Can I Do to Improve My Credit Score?

For borrowers whose credit scores are less than desirable, Ruoff has plenty of suggestions on how to build that number. One of the easiest is to ensure all overdue payments are reconciled, as any past-due debt makes a dent in your credit report. Additionally, setting up auto-payments on recurring costs will help prevent future dings.

Credit usage is another factor in determining your score, so keeping credit card utilization below 30% of the spending limit is preferable. Curbing unnecessary spending on credit cards will help control this number in the months leading up to credit applications. Your credit mix, or the types of accounts you currently hold, also plays a role. Staying current on both installment loans (like car payments) and revolving debt (like a credit card) will show lenders that you can handle various types of credit successfully.

For some borrowers, especially younger ones, increasing their credit scores might take a little time, as the length of their credit history is also considered. First-time homebuyers often struggle with lower credit scores due to this one rather unavoidable issue. Luckily, there are supports like first-time homebuyer grants to help get these dreamers through their new front door.

The importance of your credit score cannot be overlooked, as it determines more of your daily life than many people realize. Those three digits pull a lot of weight when making large purchases like a vehicle or a house, and they also determine who will rent to us or how much our car insurance will cost. Because of its universal influence, making sure not only to build but also protect our credit score is the ultimate key to true financial freedom.