Your credit score, also known as your FICO Score, puts a numeric value on your financial habits. It’s a quick and easy way for lenders to determine how likely you’ll be to pay back your loan. Your score typically impacts what amount of credit you can qualify to get, as well as the interest rate you’ll pay on your loan.
A FICO Score under 580 is considered “poor,” while a score over 800 or above is “exceptional.” The national average, 695, is a “good” score. The national average reached a record high of 706 in 2019, which is considered a “good” score.
Watch this video and then read more about credit scores below.
New scoring models may change your credit score in 2020
FICO has announced that it will apply new credit scoring models in the summer of 2020 that are expected to positively impact—by as much as a 20 point increase—those with a score above 680 who continue to make on-time payments and use 30% or less of their available credit each month, according to Debt.org. Conversely, those with a score under 680 who miss payments and spend close to their credit limit each month could see their scores drop by as much as 20 points. The new scoring system will also take into account your historical usage of credit. If you have steadily reduced debt over the last two years, your score should go up. If you’re steadily adding debt, it may drop.
How does having a great credit score help me?
Having an exceptional credit score shows lenders, landlords and other businesses that you’re good at managing your debt and will be likely to pay any money you owe, and pay it on time.
Your “creditworthiness” can help you get your applications for loans, credit cards and apartments approved. You’re also likely to get pretty good interest rates, which can help save you a lot of money.
What if I have a good, but not “exceptional,” credit score?
Having an average credit score can mean you may qualify for a loan or credit card, but your interest rate may be higher than for people who have an “exceptional” FICO Score of 800 or above. That means you’ll pay more in the long run.
How does having a bad credit score affect me?
A bad credit score can have even more of a negative financial impact. First, you’ll end up paying significantly more in interest on your loans than your counterparts with good or great credit scores. Of course, people with bad credit scores usually can’t afford to spend more money.
Not only will having a bad credit score make it more expensive for you to own the things you have, it also can make it very difficult to even get the things you want, such as a credit card, auto loan, or even a job or apartment. You could be turned down because your low FICO score indicates that you may not be able to pay down this new debt or pay your bills on time.
A bad credit score can make it difficult to get the things you want. You could get turned down for the following because the lender, landlord or business fears you won’t be able to meet your financial obligations in a timely manner:
- Credit card
- Car loan
- Cellphone contract
A bad credit score can make it more expensive to afford the things you have. If you get approved for the things you want, you may end up paying a premium in the form of high interest rates. This essentially acts as extra “insurance” for the lender in case you default on your financial obligation.
- Higher interest rates on your credit cards, mortgage, auto financing and other loans
- Higher interest rates on your car insurance
- Being required to pay a deposit on utilities, such as your smartphone, cable and electricity
How can my credit score impact me financially?
Let’s say you want to buy a new car, and you need to take out an $18,000 loan over 48 months.*
- If your credit score is in the highest range (from 720 to 850), your interest rate may be around 4.2%, with a monthly payment of $408, for a total of $1,597 in interest paid, according to an online calculator from FICO.*
- If your credit score falls in an average range of 660 to 689, your interest rate may be around 7.9%, with a monthly payment of $439. You’d pay $3,051 in interest total.
- If your credit score falls within the lowest range of 500 to 589, your interest rate may be around 16.6%, with a monthly payment of $516. Over the life of that loan, you’d pay $6,763 in interest.
A low credit score vs. a high one will cost you an extra $108 per month. That’s an extra $5,184 over four years.
Clearly, you can’t afford to have a bad credit score!
How can I improve my credit score?
Fortunately, FICO scores change frequently and depend a lot on your recent credit activity. That’s good because it means you can take action now and see improvements to your credit score relatively soon.
Improving your credit score does take effort, though. Here are a few things you can do:
- Check your FICO Score now, and keep tabs on it to make sure it’s moving in the right direction.
- Get your free annual credit report so you can see if there are any issues you can address now, such as closing accounts you don’t use or paying off delinquent accounts.
- Make sure you pay your bills on time because recent delinquencies reduce your score.
- Keep a few older accounts open to demonstrate your credit history and creditworthiness.
- Don’t max out your available credit limit. Keeping a good “credit utilization rate” also demonstrates your creditworthiness.
- Work with a credit counselor if your credit score and financial situation is in need of an overhaul.
*Calculations done via myfico.com, with rates as of March, 2020.