Why Is Your Credit Score Important? (Plus Tips)

Your credit score is one of the most important numbers in your financial life, and because it follows you through adulthood, it’s in your best interest to understand how it’s calculated and what you can do to manage it over time.

Your credit score is a three-digit number that lenders, banks and other companies use to evaluate how likely they are to recoup any funds they let you borrow, and most importantly, whether you get approved and the terms for any loan or line of credit you may receive. Your credit score changes monthly and reflects several factors, such as your payment history and credit utilization, among others that we’ll discuss below.

What Are Credit Scores Used For?

Lenders use credit scores to determine eligibility for various loans, mortgages, and credit products. Your credit score also impacts the range of interest rates and credit limits lenders and banks may offer.

For example, if you want to apply for a mortgage, you must meet the credit score requirements for each loan program. So, let’s say the mortgage program you want requires a 680 minimum credit score, and that’s your exact score. You may qualify for the program, but the lender may give you a slightly higher interest rate than a borrower with a higher credit score. When it comes to loan terms, the higher your interest rate, the more expensive it is to borrow funds; the lower your interest rate, the less expensive it is to you.     

Credit scores may also affect the credit limits you receive on credit cards. If you have an average score, you may qualify for the credit card but with a much lower credit limit than someone with a higher score.

Other areas your credit score may impact include completing a rental application, setting up new utilities or even buying a new cell phone. Anyone giving you a service in anticipation of you making monthly payments may use your credit score to determine if you’ll make your payments on time.

How Credit Is Measured

FICO^® and VantageScore^® (two of the most common credit scores) range from 300 – 850, but each considers different factors when calculating your credit score.

Most lenders use FICO^® Scores, which consider the following criteria:

• Payment history: 35%
• Amounts owed (credit utilization): 30%
• Age of credit: 15%
• New credit: 10%
• Credit mix: 10%

You can easily view your FICO^® Score inside the Rocket Money^SM app.  

VantageScore^®, which uses the Vantage scoring model, considers the following criteria:

• Payment history: 41%
• Credit utilization: 20%
• Age of credit: 20%
• New credit: 11%
• Credit balances: 6%
• Available credit: 2%

The table below shows where the various ranges of credit scores fall. Note that each scoring model has its own way of partitioning the scores.

It’s best to aim for a good credit score or higher to have the highest chance of loan approval and the best rates and terms.

How Your Score Impacts Your Future

Your credit score affects the loans or credit cards you can get approved for today, but it also impacts your future.

Amount Of Interest Paid

The better your credit score when you apply for credit, the better interest rates lenders can offer. A lower interest rate means a lower monthly payment compared to a higher interest rate over the same repayment term. It also means less interest paid over the life of your loan.

Qualifying Vs. Not Qualifying For A Mortgage

Your credit score is one piece of the puzzle, but lenders often look at your income and total debt, especially when you apply for a mortgage. Both you and the lender want to make sure that you can comfortably pay back your loan before agreeing to any terms, and lenders will verify the information needed to help you confidently afford your loan.

Rent Limitations

Based on your credit score, you may be limited on where you can rent. Landlords have different policies about the credit scores they require, but like mortgage lenders, want to avoid any chance of nonpayment. Landlords typically associate higher credit scores with a lower chance of rent problems.

Job Prospect Limitations

Tips For Maintaining A Good Credit Score

Keeping a good credit score is crucial to your finances and potentially other areas of your life. Here are some simple tips to maintain or increase your credit score:

Make Payments On Time

Payment history is the largest factor of both the FICO^® Score and VantageScore^® models. Credit bureaus determine late payments in 30-day increments. Paying 30 days past the due date can drastically affect your credit score and cost you money in late fees, depending on the type of debt.

To ensure you have a good credit score, strive to pay your bills on time. The easiest way to do this is to set up automatic bill pay. If you don’t have a fixed income or aren’t comfortable with autopay, create a budget that ensures you make each payment on time. You can easily create a budget inside Rocket Money to help.

Keep Your Credit Utilization Low

Your credit utilization ratio measures the amount of debt you currently have compared to your total credit lines. For example, if you have a balance of $300 on a credit card with a $1,000 credit limit, your credit utilization ratio would be 30%. The less debt you use out of your total available credit limit, the better it is for your credit score.

For the best credit score, aim for a credit utilization ratio of 30% or less. This means your total debt from all open credit lines is 30% or less of your total credit limit.

If your credit utilization rate is higher than 30%, it can greatly decrease your credit score, especially in the eyes of lenders that use the FICO^® credit score model.

Avoid Closing Credit Accounts

Most people assume they should close old credit accounts they no longer use. For example, if you opened a credit card to get a new customer discount, you may consider closing it a year later when the benefits are gone – but generally, you shouldn’t.

Another credit score factor is the credit age or the average age of all your credit lines. The “older” your credit history is, the better it is for your credit score. Lenders like this, too, because it gives them a longer period to evaluate your repayment habits.

Avoid Defaulted Accounts

Defaulted accounts are the worst form of late payments on your credit report. When you have a defaulted account, the creditor “gave up on you” and either charged your account off, known as a “charge off,” or sold it to a collection agency.

Not only do the late payments hurt your credit score, but the presence of a collection on your credit report damages it further. This is important to note as your credit history can impact your credit score for up to 7 years.

Limit New Credit Applications

Each application for new credit may slightly decrease your credit score temporarily because the creditor pulls your credit in what’s called a “hard inquiry.” This is different from a “soft inquiry,” like checking your own credit score, which does not impact your credit. This means you want to keep any hard inquiries spread out over time if possible. 

Each hard inquiry slightly lowers your credit score, and any new credit may also lower your average credit age. Further, putting expenses on credit that you can’t afford at the time could also increase your credit utilization ratio, potentially affecting your credit score in multiple ways.

Try to limit new credit applications to times when it’s necessary and to your best advantage. Alternatively, requesting a credit limit increase from your lender on an existing card may help improve your credit utilization assuming you don’t increase your spending.

Check Your Credit Reports

Every consumer gets free weekly access to their credit reports and should use it. You can also review your credit report as a Rocket Money premium member or monitor just your credit score for free. Checking your credit report regularly ensures there isn’t any fraudulent or inaccurate information on your credit report that is hurting your score.

Fraudulent activity is any action you don’t approve of, such as someone stealing your credit card or opening a credit card in your name.

Inaccurate information can also occur on accounts you own. For example, if your mortgage company didn’t report your last payment, you may look like you are 30+ pays past due when you paid it on time. If you see inaccurate information, contact the credit bureau with proof of the on-time payment to start the dispute and correct your score.

The Bottom Line

Even if you aren’t considering applying for new credit soon, there are plenty of reasons to ensure you have good credit. Life is full of surprises, and you never know when you may need to apply for credit, a service or even a new job that requires a good credit score. We hope these tips are helpful to manage and improve your score moving forward.

Download the Rocket Money app to find out your credit score to stay on track with your financial goals.