Do we sometimes obsess on credit scores? Yeah, probably. But they are important. Sure, a credit score is just a number, but it’s a representative one of a subject much of the world considers to be extremely important: our credit histories.
Credit scores exist because they offer the reviewer a snapshot of your credit report. If you’ve ever seen a full credit report, you know it’s a fairly complex document that’s rampant with coding. Credit scores enable a reviewer to look at the scores before deciding to dig deeper. An excellent credit score may indicate that no further investigation is necessary. And average score might suggest deeper review, and a poor one could mean a summary denial.
That means that credit scores make life easier for the people and agencies we do business with, but not necessarily for us. But that’s why we need to keep a close eye on our credit scores, so we can fix what’s broken before it becomes a problem.
How important is a credit score?
We generally tend to think about credit scores when it’s time to borrow money. This can be for a car purchase, a credit card or credit card balance increase, and most of all, for a mortgage. Credit scores matter in the approval process of nearly any type of loan, but they can also affect the interest rate you pay. The best rates are usually reserved for those with the best credit scores. So, generally speaking, the higher your credit scores, the lower your interest rate.
But there are situations apart from borrowing where credit scores are important. Employment is one. Prospective employers routinely pull credit reports on their new hires, often to determine if they’ll hire them at all. Insurance companies will run credit on new customers and that can have an affect on the premiums you’ll pay. Landlords also run credit reports and often, so do utilities.
You may not think that credit scores mean much at the present moment if your situation seems pretty settled. But sooner or later, you’ll need a new loan, a mortgage, a new apartment, a job or an insurance policy, and your credit score will figure in each scenario.
What’s a good credit score?
Credit score parameters have changed some in recent years and it’s not always clear what is a good credit score anymore.
Credit scores are grouped in ranges. Excellent is as score of 740 or above; good is 680 to 739, average is 620 to 679, poor 560 to 619, and anything below 560 is considered bad. Generally speaking, a credit score of less than 620 will be insufficient in order to obtain a mortgage. Other interested parties who use credit scores will have their own established ranges that they’ll consider either acceptable or not.
As you can see, the higher your score the more opportunities will be open to you, and this is why keeping your score as high as possible is so important. Beyond qualifying you for approval for a loan, a job, an apartment or an insurance policy, excellent credit scores can often mean you’ll pay less for what ever it is you’re buying.
What to do to improve your credit score
There are several ways to improve your credit score if it isn’t presently as high as you want it to be. The first best way is to pay all of your obligations on time. The longer you go without late payments, the higher your credit score will be.
Another way is to pay off any outstanding delinquencies, such as collection accounts. Many times people don’t know that they owe these balances because of the way they come about. Sometimes a collection is the result of the residual balance on an old utility bill. Others it’s the unpaid portion of a medical bill that may never have even been sent to you. However it comes about, the best way to handle it is to pay it off as soon as possible.
There are also errors and this is not as uncommon as we think. With computerization, a simple keystroke error by an entry person could result in a late payment being recorded where there was none. If you have the evidence that you were never late—usually canceled checks or some other form of payment record—you can successfully dispute the information and get the lender to change it on your credit report.
Keeping an eye on your credit score
Because of the easy potential for reporting errors, it’s a good idea to monitor your credit scores regularly. It can cost money to do this, but there are ways to get your credit scores on line for free. This is always recommended since you’ll need to do it periodically.
Credit scores won’t reveal a specific credit problem, but a significant decline in your score can tip you off that something’s wrong. Credit scores are based on the information contained in your credit report, and a drop in your score—say at least 20 points—is an indication that something’s wrong. When it happens, order a copy of your full credit report (a triple merged, or “tri-merged” is usually sufficient) and find out what the problem is.
The advantage with doing this when your score drops is that you’ll be catching the problem just after it happens, and those are a lot easier to fix than one that’s several years old. The reason that recent is better is that you probably have your payment documentation close at hand, either in recent bank statement or available with your online banking.
As soon as you discover a problem, fix it immediately. The wheels of the credit reporting system don’t roll as quickly as we’d like and by fixing problems when they happen, you’ll be prepared in advance for applying for a job, a credit card, a mortgage or an insurance policy.
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.