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Credit

What is your credit score and why does it matter?

By Shelley Sines

September 2015

Even after nearly a decade of sticking to responsible financial habits, I still get that familiar sinking feeling in the pit of my stomach when I know my credit score is going to be checked.

Way back then, I made all the classic rookie mistakes: Missing credit card payments. Forgetting to pay a hospital bill that ended up in collections. Ignoring a few (okay, dozens of) parking tickets. Going over my credit card limit. Applying for too many cards all at once.

Basically, I was a dumb college kid who had absolutely no idea how important credit is. I thought, no big deal. I’ll pay twice as much next month. Or, after I graduate college I’ll make plenty of money to pay this stuff off. I might have been getting an A in my Advanced Critical Theory in Modernist Literature class, but I was earning a big fat F in the real world.

Eventually I did realize that I’d dug myself into a very deep hole. And so I graduated college with my hard-earned English degree, no practical job prospects and a couple thousand dollars in past-due debt. This, finally, was my big wake-up call.

I was lucky enough to land a decent-paying job soon after graduating. So I spent the next several years methodically paying all of my bills on time, examining my credit reports for inaccuracies and paying my credit card bills off in full each month to boost my score. And of course, I had to pay off all my old debts first. By the time I hit 28, my credit was in pretty good shape. I had a score in the mid-700s and I was able to buy a house with my husband.

The moral of my story is, it took me YEARS to repair the damage I’d done, and I could have avoided it all if I’d treated my credit score with a little respect. Sure, it could have been a lot worse. But I definitely could have saved myself lots of stress, time and money.

Why does your credit score matter?

I know, I know — it’s easy to convince yourself that your credit score doesn’t mean much. And maybe if you ignore it, it’ll go away, right?

But in reality, if you’re smart enough to arm yourself with a good credit score, you’ll have WAY more access and opportunities than you would with a crappy one. A good credit score says something about your character. It means you’re responsible, and that you honor your debts. It means you’re someone who can be trusted.

Who looks at your credit score? Well, more people than you might think. Everyone knows your credit is checked when you apply for a credit card or loan, but it can also be pulled by someone who is considering hiring you or renting you an apartment.

And even though it might seem like it’s way far off in the future, when you decide you’re finally ready to buy a home, a good credit score can literally save you thousands and thousands of dollars each month. (That means you might be able to afford a house with, say, granite countertops, instead of the one next to a set of train tracks.) Typically, a score of 720 or higher is considered “good.”

Your FICO® scores

FICO scores are what most lenders use to evaluate your credit. You actually have 3 FICO scores, 1 for each credit bureau (Experian, TransUnion and Equifax). Each score is based on information that these credit bureaus keep on file about you. And as information about you changes, your FICO score is updated too. It’s all very Big Brother-ish.

In fact, your scores are probably different with each credit bureau, and there could be errors on 1 file that don’t appear on the other 2. It definitely pays to review your full credit reports on a regular basis to make sure nothing fishy is going on. You can get all 3 of your credit reports for free once a year at annualcreditreport.com.

However, you have to pay if you want to learn your actual FICO scores. There are a lot of websites that provide this service, but a good place to start is myfico.com. It can vary, but here’s how a FICO score typically breaks down:

  • 35% payment history
  • 30% amounts owed
  • 15% lengths of credit history
  • 10% types of credit in use
  • 10% new credit

And if you really want to over-achieve and get yourself a top-tier FICO score, you’ll need to pay extra close attention to these 2 things:

  • Maintaining an active credit profile, meaning you consistently use the credit granted to you AND you pay off your debts on a regular basis. Creditors need to see actual proof that you can manage your credit.
  • Maintaining a decent credit utilization ratio, meaning the amount of money you owe creditors versus your overall available credit. Most experts recommend keeping your utilization rate under 30%. (So if you have a total of $10,000 in credit available to you across all of your loans and credit cards, you’d want to keep the amount you actually owe around $3,000.) People with both very low and very high utilization rates have lower FICO scores.
 

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LaCheron Conway •

Thank you

Kemekia Dickerson •

This helped a lot with knowing how credit works.

Brandy Torres •

Thanks

Ka Zoua Vang •

This helps a lot with knowing how credits works. And how important to keep your payment on time.

Carlos Lopez •

Thanks

Ryan Placer •

Learned a lot for first home buy.

Christine Pellerin •

Very helpful info

Danielle gadue •

Great information.

Jeremy Hare •

Very helpful and explained a lot

Timothy Bulluck •

Information was helpful

Shirley Pearson •

Thank you so very much! Very helpful.

Kathy Campbell •

Great read! Thank you for the information! Kathy C.

Carolyn Moffett •

Buying a home is a great sense of accomplishment and gives you dignity and pride about yourself that you have accomplished the American Dream. And this was done through making a lot of sacrifices and denying yourself of things you did not need and some that you just could not afford to buy if you wanted to accomplish your dream if owning a home. But in the end when you walk into your home you can say it was all well worth it.

Erica •

Good read.

David Page •

Thank you, very informative information

Shirley Solano •

This is all great information for anyone buying a home for the first time!

stokes •

This is very good information It's very very informative things that I have forgotten that I picked up when I purchased my 1st home

Gregory L Gayarski •

Very informative.

Shelia Gibson •

I think it is great so people can understand what they need to do establish credit.

Yolanda Anderson •

Thanks

Manoj Kumar Rayalla •

This is all great information for anyone buying a home for the first time!

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Shelley

Read more articles by Shelley
Shelley Sines has been writing for MGIC since she graduated from college in 2007. Currently raising a sweet little family with her husband in the suburbs of Milwaukee. Happiest when cooking or gardening. Competitive Scrabble player. Enthusiastic about road trips, wine, good TV.
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