Knowing your credit score is important. But why? What does your credit score really affect and how can it impact your day-to-day life? Your credit score has more power than you may realize and it can affect a range of areas in your life like buying your dream home, upgrading your vehicle, or landing your dream job.
What is your credit score?
Your credit score is a calculated number from 360 to 850 that represents how likely you are to repay your debts. The higher the score, the more likely you are to repay all your debts.
Do you know your credit score? If you don't, you may need to purchase an annual credit report that includes your credit score. A credit report is the history of your debts and payments. Your credit score is calculated based off the information on your credit report.
Do you know what’s on your credit report? You should. If you haven’t reviewed your credit report in a while, now’s the time. You are allowed to get a free credit report annually from each of the three big credit reporting companies: TransUnion, Equifax, and Experian. Therefore, you can check your credit report 3 times annually at AnnualCreditReport.com. You should review this to ensure it is correct and that all the debt on your credit report is yours. If any of the debt is unfamiliar to you, you will need to alert the company to the fraud. Unfortunately, your free annual credit report doesn’t include your credit score.
What affects your credit score?
As we said above, your credit score is made up of the information from your credit report, and it is more than just how much money you currently owe.
The following components affect your score:
35% = Payment History: Did you make your payments on time? Did you skip any payments?
30% = How Much You Owe: What are your balances for your various loans and credit cards? What is your Credit Utilization Ratio?
Credit Utilization Ratio: This calculation shows that you aren’t maxed out on all your debt and that you have more available credit than current debt. For example, if your credit card limit is $10,000 and your current balance is $5,000, your current credit utilization ratio is 50%. To have a positive impact on your credit score, your credit utilization ratio should be no more than 30%.
15% = Length of Credit History: How long have you demonstrated healthy credit habits?
10% = Type of Credits: Do you have a mix of credit types? Do you have loans for large purchases or do you only have credit cards?
10% = New Credit (Inquiries): Are you applying for a lot of credit close together? Are taking out more debt than you can repay?
How does your credit score affect you?
Your credit score can be seen as your repayment rating. If your rating is low, you are a riskier borrower than someone with a high rating. When applying for a loan, line of credit, or other entity that requires a payment, lenders look at your credit score to determine your Annual Percentage Rate (APR). The APR determines the interest you’ll pay in a given time frame. Ideally, you’ll always want the lowest APR, and the lowest credit score of all applicants is what's used to determine that rate. The higher the credit score, the lower the APR and ultimately, the less money you’ll pay in interest. Having a better score could save you thousands of dollars in the long run when dealing with large dollar loans.
Here’s how having a low credit score can affect your:
Dream Home. Whether it’s a first, updated, or refinanced home, your credit score will determine your mortgage payment as well as the type of mortgage you qualify for. You may not get pre-approved for your dream home if your credit score is in the poor zone. You may receive a reduced loan amount or be asked to improve your credit score and apply again later. For additional mortgage loan information, please visit our partner Mortgage Center.
Vehicle. Advia offers both new and used loans for auto and recreational vehicles. Similar to a Mortgage Loan, your credit score will determine your APR. A score of 690 will attain a higher APR than a score of 730.
Career. Depending on your career field, employers are now performing credit checks as part of the job screening process. You may not demonstrate trustworthiness if your credit score is poor.
Love Life. After you get married, if you decide to open joint accounts, creditors will look at both of your credit scores. If you or your future spouse have a poor credit score, it will affect your joint account (credit card, mortgage loan, auto loan, etc.). The good news, love wins in the end as the person with higher credit helps increase their spouse's credit score.
How can you improve your credit score?
Make your payments on time. As you can see above, your payment history is more important than how much you owe. You need to show that you can repay your debts on time, guaranteed.
Pay down your debt. Don't allow yourself to max out your credit cards. In fact, when you use over 50% of the line available, your credit score starts to go down. If you are over 50% maxed out on your card, contact your credit card provider and see if you can get a higher limit to get you under the 50% threshold or pay down that debt as quickly as possible.
Only apply for and open credit accounts you actually need. Your credit score is quality over quantity. If you have a few credit cards with low credit utilization ratios that you repay on time each month, that will improve your credit score.
Pay all your bills, not just your loan payments. Your utility bills can end up on your credit report if they go unpaid. So can your taxes, medical bills, and even library fines.
Don’t close your accounts just because your balance is zero. Closing accounts that are paid in full doesn’t improve your score, but could actually have a negative effect. Any account with a zero balance can increase your credit availability (think credit utilization ratio) as well as your length of credit history.
Start accruing credit. Is no credit better than bad credit? Neither is ideal. Creditors need to see your ability to repay debt, so start getting some credit to show your trustworthiness. Open a credit card and make regular payments or even payoff the credit card balance each month.
How can Advia help?
- Open an Advia Visa Platinum Credit Card to start building good credit—just make sure to make your payments on time! We have card options with rewards, as well as a fixed APR for first-time cardholders. If credit cards are new to you, select one category to use it on, something that you know you can pay off every month. This will help build your credit utilization ratio as well as payment history.
- Apply for our Credit Builder Loan to improve credit and build a Savings Account. At the end of loan, your credit score will have increased and the money in your Savings Account will be yours.
- Consolidate high-interest debt into one manageable monthly payment to avoid missed payments and to lower your interest rate.
- Avoid a missed payment by using Advia’s Loan Skip Pay. It does not negatively impact your credit score.