Unlock the Power of Your Credit Score in 2024

As we look forward to the beginning of 2024, you can get a head start on a resolution to be more financially fit in the new year by learning about credit scores and what you can do to make a positive impact on yours. 

What Is a Credit Score? 

Simply put, a credit score is like a grade for how good you are at managing money. It is one of the most important tools that lenders and financial institutions use to assess the risk of lending money to you. A higher credit score indicates a healthy credit history, therefore, a lower credit risk, making you more appealing to potential creditors. Credit scores typically range from 300 to 850, with higher scores being better, indicating that you have consistently made payments on time to satisfy your credit obligations.

How Is a Credit Score Calculated? 

You might be surprised to learn that you can have multiple different credit scores at the same time. Based on where the lender obtained their data (from one, two, or all three credit reporting agencies), the credit score model that is used, the lenders own criteria for issuing credit, and the timing of when the score was produced. A hypothetical scenario for calculating a credit score might weigh the following factors this way:

• Payment History (35%): This is the most important part. It’s like getting a gold star for paying bills on time. If you pay on time, your score goes up. If you miss payments, it goes down.

• Credit Utilization (30%): Imagine you have a money jar, and you use only a little bit of it. That’s good for your score. But if you use a lot of it, it’s not so good. This measures how much of your available credit you’re using.

• Length of Credit History (15%): The longer you’ve had credit (like a credit card or loan), the better. It’s like experience points. More experience means a higher score.

• Credit Mix (10%): Having different types of credit, like credit cards and loans, can be like having a diverse team. It’s good for your score, but you don’t need to have them all.

• New Credit (10%): Every time you apply for new credit, like a loan or a credit card, it can slightly lower your score. Too many applications at once can hurt your score.

Lenders will also look at other factors, such as your income, your assets, or how long you have been at your current job.

Why Does Your Credit Score Matter? 

• Getting Credit: When you need to borrow money, like for a credit card or a car loan, lenders look at your credit score. If it’s high, they’re more likely to say yes. Plus, you might get lower interest rates, which means you pay less in the long run.

• Interest Rates: A good credit score can mean lower interest rates on loans and credit cards. Lower interest rates save you money, so it’s a win.

• Renting a Home: Landlords often check your credit score when you apply to rent an apartment.

• Utility Bills: Some companies might look at your credit score before deciding if you need to pay a deposit for things like electricity and water.

• Job Opportunities: Some jobs, especially those handling money, check your credit as part of the hiring process.

Resolve to Improve Your Credit Score Using These 10 Tips

• Pay Bills on Time

• Manage Credit Cards Wisely

• Be Careful with New Credit Inquiries and Too Many New Accounts

• Check Your Credit Report at Least Once a Year 

• Stay Alert for Signs of Identity Theft

Build a Credit Score Without Debt

Young adults and those who have never had a need for credit may not want to go into debt but want to build their credit score. Here are a couple of ways that you can build your credit score without debt.

• Apply for a credit-builder loan, which places the money you borrow into a certificate of deposit (CD) or savings account that you can claim after making 12 monthly payments. 

• Apply for a secured credit card, which gives you a line of credit that is backed by a cash deposit.

With a Better Credit Score, Be Proactive to Save Money

Once you’ve put in the work to get your credit score above 700, you can turn your attention to becoming more financially fit. Investigate whether refinancing your mortgage at a lower rate could save you money, while being mindful of closing costs or other fees. At renewal time, ask your auto and home insurance provider to re-run your rates, and consider shopping around with other insurers. Lenders, landlords, and insurers want to do business with people with excellent credit, so they will be competing for your business and offering you better deals.