Credit scores, which are based on the information in your credit report, help others understand the likelihood that you’ll fall behind on payments. Credit scores commonly range from 300 to 850, with a higher score indicating that a person is more creditworthy (i.e., more likely to pay bills on time). Creditors, such as banks and credit card issuers, often turn to one’s credit score when reviewing an application. But your credit score affects, and plays an important role in your life even if you aren’t trying to borrow money.
Having a good credit score is important because your credit can impact many areas of your life. Good credit can make it easier to qualify for loans and credit cards, allowing you to finance large purchases with low interest rates or get a premium rewards credit card with benefits.
The benefits of a good credit score go beyond debt. Bad credit can affect your housing applications, insurance premiums and security deposits, adding roadblocks to many of life’s everyday necessities.
Here’s a closer look at when and how credit scores are used:
1. Buying a house
2. Securing better interest rates on loans and credit cards
3. Landing and keeping a job
4. Renting an apartment
5. Refinancing loans
6. Purchasing a car
7. Getting a cell phone
8. Setting up utility accounts
9. Paying for insurance
It may not come as a surprise that your credit score affects your ability to qualify for a mortgage and buy a house. But what might be surprising is that the free credit scores you receive online aren’t the credit scores that mortgage lenders often use.
There are different versions of credit scores, and most free scores are either a VantageScore 3.0 or FICO Score 8. However, mortgage lenders tend to use much older versions of the FICO Score. Fortunately, the score ranges and scoring factors are largely the same, and taking steps to improve one of your credit scores (see the tips below) can help you increase all of your scores and qualify for a mortgage.
You may need a score of at least 500 to qualify for a mortgage with a 10% down payment, or 620 with a lower down payment. But you may need a score of 760 or higher to get the best interest rates.
Banks, lenders and credit card issuers will also check your credit before approving (or denying) your application. If you’re approved, your loan or credit card’s interest rate is partially based on your credit score. The higher your score, the more likely you are to get approved and receive a low rate. However, other factors, such as your income, outstanding debt and history with the creditor can also impact your rate.
While many lenders often use specific FICO credit scores, other lenders may use one or several scores. For example, a large lender might review your credit report and then use a proprietary scoring model to create a credit score based on that report. Creditors may use their proprietary scores along with, or instead of, the generic credit scores from FICO or VantageScore.
Employers may want to know that you’re financially responsible and don’t have burdensome debts that could affect your judgment. Even if you’re already employed, your credit could impact your ability to get a promotion or keep your job, particularly if it requires a security clearance.
Your credit score does not impact your employment, though — that’s a common myth — but your credit report might. The important distinction is that employers may be able to review your credit report, but the version they receive doesn’t come with a credit score. It also omits other pieces of information, such as your date of birth and account numbers, because employers don’t need this data to make a hiring decision.
A company can’t pull your credit as part of an employment check unless you give written consent, and some states outlaw the practice altogether.
Many landlords and property management companies want to review your credit before agreeing to rent you an apartment or home. Having poor credit can make it difficult to get approved, or may lead to a larger security deposit requirement, while excellent credit could make your application stand out.
Refinancing a loan requires qualifying for a new loan and using the proceeds to pay off your current debt. It’s a common way to save money or lower your monthly payments (maybe even both) with student loans, auto loans and mortgages. You can also use a personal loan to consolidate and refinance higher-rate credit card debt.
Because you’re applying for a new loan when you refinance, your creditworthiness can impact the rates and loan amounts that lenders offer you. The better your credit, the more likely you’ll get approved for a low-rate loan and benefit from refinancing.
Although auto loans are secured by the vehicle you’re looking to purchase, auto lenders will still check your credit to determine your eligibility and rates. Having good to excellent credit could help you qualify for the lowest-rate auto loans. It could also help you qualify for special financing offers, such as 0% interest during a promotional period.
Your credit likely won’t come into play if you plan on buying a phone outright. But the latest phones can cost well over a thousand dollars, and you may prefer to make a low (or no) down payment and pay off the remaining balance over time. Or, you may want to lease a phone if you plan on regularly upgrading.
The carrier may want to check your credit before lending you a phone or letting you make payments over time. They could require a larger security deposit, or outright deny your application, if you have poor credit.
Utility companies, including gas, water and power providers, may check your credit before opening a new account for you. If you have poor credit, you may have to pay a security deposit to open an account and get your utilities switched on. Having good or excellent credit can make the entire process easier and cheaper.
In many states, insurance companies may use a credit-based insurance score to help determine your premiums. While these scores differ from consumer credit scores, they’re based on your credit history, and having a long history of paying your bills on time could help you qualify for lower premiums.
Generic consumer credit scores depend on the information in one of your credit reports from Equifax, Experian or TransUnion. While each scoring model may use slightly different rules or weighting to determine your score (one reason your scores can vary), they use similar scoring factors. These are generally broken into five categories:
- Payment history: Your payment history can be the most influential scoring factor. Making at least your minimum payments on time can help you build a positive credit history. Missing payments, having accounts sent to collections and filing bankruptcy can hurt this factor.
- Credit usage: The credit usage factor may be primarily influenced by your credit cards’ balances and credit limits. Having high balances relative to your credit limits, also known as a high utilization rate, can hurt your scores. Paying down debt and maintaining a low utilization rate can help your scores.
- Length of credit history: The length of time your accounts have been established, including the age of your oldest account and the average age of all your accounts, impacts your credit score. The more experience you have, the more points you may receive from this category. Closed accounts can impact this factor as long as the account is still on your credit report.
- Credit mix: Your credit score may be higher if you have experience with both installment loans, such as a personal loan or a mortgage, and revolving accounts, such as credit cards. Closed or paid off accounts can continue to impact this factor, as well.
- Recent applications: Applying for a new account often leads to a hard inquiry, a record of when creditors review your credit report to help them make a lending decision. These hard inquiries can lower your credit scores by a few points, but the impact often diminishes within a few months.
Knowing that credit can impact so many aspects of your life, you may want to take an active approach to monitoring and improving your credit score. Even if you’ve made mistakes in the past, you can follow these basic credit improvement tips and work your way toward good credit.
You can start by checking your credit report and a credit score based on that report. LendingTree provides you with a free VantageScore 3.0 credit score based on your TransUnion credit report. You can get a free copy of your credit report from each of the credit bureaus once every 12 months at annualcreditreport.com.
If you see incorrect negative information in your report, you can file a dispute to get it corrected or removed, which could quickly increase your score. An account that isn’t yours may also be an indication of fraud, and you should contact the creditor to close the account.
Because payment history is often the most important scoring factor, try to make sure you’re at least making your minimum payments on time. If you suspect you’ll have trouble making a payment, reach out to your creditors right away.
Creditors may offer hardship options that can make it easier to pay your bill without hurting your credit. For example, your federal student loans may be eligible for loan deferment or forbearance, which allows you to temporarily stop making payments, or an income-driven repayment plan that could lower your monthly payment amount.
Lowering your utilization rate could be one of the quickest ways to improve your credit scores — the lower the better. You can calculate your utilization by dividing your credit card balance by the card’s limit. Or, if you have multiple cards, add up the balances and credit limits and then divide the total balance by the total limit.
Credit scoring models only look at the balance on your credit report, which credit card issuers may send to the credit bureaus around the end of your statement period (your bill for that balance is often due about 21 days later). As a result, you could have a high utilization rate even if you pay your bill in full. If that’s the case, you could lower your utilization by making early payments on your account.
You could also have high utilization because you’re carrying a credit card balance. If you can’t afford to pay down the balance right now but you have okay credit, you could try to consolidate your credit card debt with a personal loan. Utilization only looks at revolving debt, so using an installment loan to pay off revolving credit cards can lower your utilization rate.
Paula Pant contributed to this report.