Why your credit score matters

A hand holding a phone showing a credit report.

What is a credit score?

The short answer: It’s a number that represents your creditworthiness.

A longer answer: Your credit score is calculated based on an analysis of your credit files and is used by lenders to assess the risk associated with extending credit to you. Scores typically range from 300 to 850, depending on the scoring model used (e.g., FICO or VantageScore), generally categorized as follows:

  • Excellent: 750 and above

  • Good: 700-749

  • Fair: 650-699

  • Poor: 600-649

  • Bad: Below 600

“But wait,” you might say. “I don’t need any loans. So why does my credit score matter?”

Well, you don’t need any loans today. And you might not need to get a new job today, either. But it’s impossible to see the future, and your credit score can play a significant role in that future. So, your credit score does matter, because it can play a decisive role in whether you get:

  • Lower interest rates on loans. Individuals with higher credit scores are typically seen as lower risk. As a result, they often qualify for lower interest rates on mortgages, car loans, personal loans and credit cards.

  • Mortgage and rental approvals. When you apply for a mortgage or try to rent an apartment or other property, the lender or landlord may check your credit score. A poor score could lead to a denial or require a larger down payment or security deposit.

  • A lower insurance premium. Some insurance companies use credit scores to determine auto and homeowners insurance premiums. The higher your credit score, the lower your premium could be.

  • Your ideal employment opportunities. Some employers check potential employees’ credit as part of the hiring process, especially for positions that deal with money or sensitive information. A poor credit score could influence an employer’s hiring decision.

  • Lower security deposits. Utility and telecom companies may check your credit score when you establish service. A low credit score could result in the company requiring a higher deposit.

  • Negotiating power. A high credit score may give you more leverage when negotiating terms on loans or credit cards.

  • Business financing. For entrepreneurs and business owners, a good personal credit score can be critical in obtaining business loans or lines of credit—particularly for new businesses without an established credit history.

  • Peace of mind. A good credit score shows that you’re managing your financial obligations well and can be a source of pride and confidence in your financial life (not to mention a stress-reducer).

Monitoring your credit score can also be an essential part of personal financial management. It can help you understand how your financial behavior affects your creditworthiness, and it can help you make more informed decisions.

More information on credit scores

Credit scoring models vary, but most commonly, they’re composed of the following elements:

  • Payment history (35%): Whether you’ve paid your credit accounts on time. Late or missed payments can significantly impact your score.

  • Credit utilization (30%): The ratio of your outstanding credit card balances to your credit card limits. High usage can negatively affect your score.

  • Length of credit history (15%): How long your credit accounts have been active. A longer history can positively influence your score.

  • New credit (10%): The number of recently opened credit accounts and hard inquiries (i.e., when you’ve applied to a lender for a loan). Too many new accounts in a short time can hurt your score.

  • Credit mix (10%): The variety of credit types you have: credit cards, mortgage loans or personal loans. A diverse mix can positively impact your score.

If your score is currently lower than you’d like, don’t despair. You can improve your credit score by:

  • Paying your bills on time.

  • Keeping your balances below 30% of your credit limit.

  • Not opening too many new accounts at once.

  • Regularly checking for errors on your credit report.

If you do find errors on your credit report, you can dispute them with the credit reporting agency.

Where can you access your credit score and credit report? In the United States, you can request a free credit report from one of the three major credit agencies (Equifax, Experian or TransUnion) once a year. Your financial institution may offer access to your credit score for free; check with your credit union or bank for details. There are also a number of credit monitoring apps that can help you keep track of your credit—and some, like Credit Karma or Mint, are free.

Just be sure to remember that, for all the reasons stated above, your credit score does matter and can significantly influence many aspects of your financial life. Understanding your score and taking steps to improve or maintain it will give you financial benefits and peace of mind for years to come.