As a financial planner one of the most common questions I’m asked by clients is “why does my credit score matter?” My not-so-professional answer is “why doesn’t it matter?” A good credit score can help you rent an apartment, get a loan, be approved for a credit card and land your dream job. A not-so-great credit score can prevent you from achieving all those things.
As a former 20-something who was over $50k in debt, who changed her entire lifestyle and now lives as a cash-only 30-ish year old I know the importance of a good credit score. Actually I know everything about credit scores from which actions lower them, how they can help or prevent you from achieving the things you want in life and which good financial habits can help rebuild it.
A credit score is a number between 300 and 850 that defines your creditworthiness at any given time. It’s calculated based on a number of factors such as your payment history (on time every month), the type of credit accounts you have (fixed or revolving) and your outstanding balances on those accounts.
There are three credit bureaus in the United States who report your credit behavior and calculate your score. They are Equifax, Experian, and Trans Union. Although all three use similar criteria to determine your credit score, they’re not exactly the same and therefore your credit score may vary slightly between bureaus.
Here are four reasons to check your credit score:
Change bad behavior
Financial troubles can cause a lot of stress, but the good news is that they don’t have to define your entire life. Although it does take time to rebuild your credit worthiness, it can happen within six to 12 months if you change your previous bad behavior and adopt disciplined habits.
According to Equifax “No matter where your credit score is today, there are a number of different steps you can take now that can change your credit history and help impact your credit score. You should take all the steps you can to help establish a good credit score.”
Correct wrong information
Along with your financial information, your credit report also reports your personal information such as your address and employment history. When you apply for credit lenders will look at your personal and financial stability, that’s why it’s important to check your credit bureau for accurate information.
It’s an unsaid rule, but lenders like to see the same residence and employer for at least three years. Apparently personal and financial stability helps you qualify for a loan.
Prevent and correct fraud
This is the number one reason why I check my credit score at least once a year. I want to make sure I haven’t been a victim of credit fraud. I ensure all information is being reported accurately and all accounts are in good standing.
If a payment history, outstanding balance or my personal information is incorrect I contact the lender and the credit bureau to make the corrections right away. The last thing you want is someone using your information to apply for fraudulent accounts. For example, just the other week I headed over to my victoria secret credit card login to find a ton of errant charges! I believe it to truly be an error from the store and not fraud, but the same rules apply. Being diligent can save you time and money in the long run.
If you’re buying a home
If you want to apply for a loan, a line of credit or a mortgage I suggest checking your credit score ahead of time. You can check information for accuracy and also correct any wrong information. If your credit score is below 750 it’s a good idea to review the information and change your habits to help increase your score.
Then in six to 12 months you should check your credit score again to see the improvements. If you’re good with all the information, the next step in the homebuying process is to visit your bank and get a preapproval.
How often do you check your credit score?
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