Whether you realize it or not, your credit score can have a major impact on your life. You're probably well aware that your credit report and/or score can impact your ability to get a credit card or a home loan, and can affect the interest rate you'll pay on those lines of credit or loans. But there's more to it than just that.
For example, prospective landlords and employers (with your consent) can request a copy of your credit history, which can prove to be a determining factor in deciding whether you get the rental and/or job of your dreams.
Similarly, insurance companies have found that folks with a lower credit score are costlier to cover. Therefore, insurers tend to charge more to folks with less-than-stellar credit reports.
Even utilities can penalize people with poor credit. Though utilities can't outright deny services to someone with a bad credit report, they can require that individual to put down a large deposit before commencing services, in case that individual doesn't make timely payments.
On the flip side, having an excellent credit score could mean having banks fight for your business, and it should lead to you snagging the best interest rates possible on a mortgage or credit card. It may also mean low insurance rates, and not having to put any deposits down when opening utility accounts. In other words, it means the ball is in your court. This is why maintaining a good credit score is so important.
How do you achieve a good or excellent credit score? First, it helps to understand what variables matter.
How your credit score is calculated
Though there are a few credit score scales used, the FICO score from Fair Isaac Corp. is the most common.
FICO scores range from a low of 300 to a peak of 850, and factor in five variables (albeit the precise formula is a well-guarded secret). The figure in parenthesis next to each variable describes its relative weighting in calculating your FICO score.
- Payment history (35%): Nothing is more important than making your payments to creditors on time.
- Credit utilization (30%): This describes the total amount of credit you're currently using across all of your credit accounts as a percentage of your aggregate credit available. Generally, creditors like to see your utilization rate kept under 30%, as it signals responsible spending habits.
- Length of credit history (15%): Your credit history acts like a road map for creditors. The more data points you provide, the better picture they can paint of how trustworthy you are. Having good-standing accounts open for long periods of time definitely helps.
- New credit accounts (10%): Your FICO score will also examine how many new accounts you've opened recently, as well as if any hard credit inquiries were made. The general rule here is to only open new accounts when it makes economic sense to do so. That means opening a new account to saving $2 on a shirt at a department store is probably not a smart move.
- Credit mix (10%): Lastly, FICO will examine your credit mix. In particular, your score benefits if you have a nice mix of installment and revolving loans. Installment loans are fixed each month, such as a mortgage or auto loan, while revolving loans vary based on what you owe, such as a department store credit.
Generally, a score above 700 is considered "good," while anything above 760 is "excellent." If you get your score above 800, lenders may start bending over backwards to get your business.
An invaluable lesson in maintaining an excellent credit score
While this describes the formulaic approach to a good credit score, it doesn't tell you about the nuances that'll help you keep your score up. As someone with a perfect credit score of 850, I can speak firsthand about an error I'd recently made, as well as the resolution that allowed me to keep my pristine credit score. If you're up for a short tale, I've got an invaluable lesson to share.
Without getting too deep into the specifics, I, like most Americans, have a credit card that I favor. This particular card offers rewards that can be redeemed for cash, flights, or goods and services. The point being, I use this card for practically everything.
The downside of being so taken with one card is that it caused me to lose sight of the other plastic in my wallet. These ancillary cards, which had gotten me through my college years and early work years, have a long-standing history of on-time payments built up, even if I don't use them all that much anymore. Some folks would probably suggest I close these accounts, but keeping them open lowers my credit utilization ratio, as well as lengthens the time my average account has been open. Even while collecting dust, they do serve a purpose.
However, late last month I received a letter from one of my creditors letting me know that one of these cards, which has been open since 2004, would be closed due to inactivity. Apparently, I'd lapsed and completely forgotten to make a purchase with this card since August 2016. Losing this card would have reduced my available credit, thusly increasing my utilization ratio a tiny bit. But, more importantly, it would have removed a 14-year-old card from my length of credit history. To me, that wasn't acceptable.
Having read on various credit card-based blogging sites -- because we know everything on the internet is true (cue eye roll) -- that once a creditor has decided to close an account, it's final, my prospects of keeping my perfect credit score looked bleak. Then again, I'm really stubborn, so I called my creditor. Lo and behold, it didn't take but 15 seconds of wrangling to get the representative to agree to leave my account open, with a promise on my end to more frequently use my older credit card.
Never underestimate your bargaining power
The primary point here being that you as the borrower do have bargaining power with creditors, and, in general, the better your credit score, the more of a bargaining chip you have. Creditors aren't going to simply cave and give into your needs unless you ask! If I hadn't requested the account be left open, it would have been closed due to inactivity, plain and simple.
But the idea here extends well beyond simply keeping a little-used account open. If you have a history of making on-time payments, call your creditor and ask them to reduce your interest rate. If you're late on a payment, but have otherwise been on time for all other months, request your lender to forgive your one mistake. If you're extremely late on your payments, or are struggling to make your payments, call your lender, explain the situation, and work out a plan on how to fix it. Ultimately, it's cheaper for creditors to keep their existing customers than it is for them to acquire new customers, so it's in their interest to work with you, regardless of your credit score.
If you take anything away from my personal story, let it be this: When in doubt, ask your creditor. The worst thing they can say is no, and there are far worse things in this world than that.