I didn’t give a crap about building credit for quite a while in my 20s. I had two retail credit cards in order to get all the perks (hello, $15 gift card in my birthday month!), but other than that, I didn’t think twice about it. I had a debit card to cover all my expenses, I wasn’t planning on buying a car soon, and I was light years away from owning a home. I mean, really, how big of a difference did it make?
Once I graduated, I opened an actual credit card (AKA not one from Macy’s or Express that I only signed up for to get 20% off my shoe purchase) on the advice of my dad, and I’m thankful I did. I didn’t have any debt until I bought my home this past year, so my credit cards were a main source of proving to future lenders how trustworthy I was when it came to making timely payments. And let me tell you, when you’re looking to borrow a butt load (yes, that’s an actual measurement in my world) of money from someone, your credit score becomes EXTREMELY important.
What Exactly is a Credit Score?
In layman’s terms, your credit score is a standard measurement used by the financial world to indicate to lenders how reliable you are to make your loan payments on time and meet your financial obligations. Three main companies collect credit data about you and issue credit reports: Equifax, Experian, and TransUnion. Note, your credit report does not provide your credit score; instead, it gives you your credit history, which should be checked annually to ensure no daggers are sitting there, unknown to you but known to your lenders. It’s free as long as you only check it once a year, so no skin off your back (thanks to my roommate Lizzie for helping me think of that phrase – sometimes my blondeness comes out.) You can also check your credit score for free once a year on www.Credit.com, as well as find out what is affecting it (which would also be shown on your credit report) and how to improve it. With all that information, you now have no excuse but to view them both. See how I backed you into that corner? In chess, they call that a checkmate.
How Your Credit Score Can Help You Out
Various companies provide credit scores, but the most well-known (and widely-used) is the FICO score, which ranges from 300 to 850. The higher the score, the better, and the following are some general guidelines regarding the rankings:
760 – 850: Excellent
720 – 760: Very good
680 – 720: Average – very good
620 – 680: Fair – poor Below
By maintaining a high credit score, you are able to get access to the lowest interest rates a lender provides. Meaning what? Money in your pockets, ladies. Money in your pocket.
Let’s look at the example below. The chart shows the difference in your monthly payment and total interest paid on a $200,000 30-year fixed mortgage. If you have the highest credit score (meaning 99% of the time you are timely on your credit card and loan payments), you will pay almost $200 less a month and nearly $70,000 less in interest over the term of the loan. Seems like a great reason to improve your score, huh? If you’re shaking your head no, then just stop. Stop.
Well, that concludes our lesson for today. Your credit is something you want to take seriously, and I cannot stress enough how severely you will hurt yourself in the long run if you are notorious for making late payments. Give yourself the opportunity to get ahead in life and keep it in check.