Understanding Credit Scoring

/ Worley Erhart-Graves Financial Advisors/

Credit scores, often referred to as FICO scores, are comparable to a GPA. They start with your first credit transaction and are continuously reassessed based on your financial activities. There are three major credit bureaus (TransUnion, Experian, and Equifax) that provide individual scores. Scores range from 300-850, and, similar to school, it is essential to establish a strong starting point, or you could be stuck fighting an uphill battle.

 Factors Affecting Your Credit Score:

  • Payment History (35%)

  • Outstanding Balances (30%)

  • Average Length of Accounts (15%)

  • Number of New Inquiries (10%)

  • Types of Accounts (10%)

 The Benefits of a High Credit Score

Financial Savings:

A high credit score grants you access to lower interest rates, reducing the cost of borrowing for major purchases like homes and cars. For example, a 600 credit score may result in an 8% interest rate on a car loan, while a score of 740+ could secure a 5.25% rate. This seemingly small difference can save you around $2,000 on a $30,000 car, which is equivalent to about a year's worth of gas! Additionally, as you improve your score, you may have opportunities to refinance or consolidate debt to lower interest rates further.

Credit Forgiveness:

Building a high credit score provides a buffer against occasional setbacks, such as applying for a new credit card, missing a payment, or making a late payment. Maintaining a high score ensures access to favorable interest rates and prevents small mistakes from significantly impacting your creditworthiness. For instance, not making a payment can lower your score by up to 180 points. However, if you correct it by making a late payment and continue to make on-time payments, your score will improve again. Therefore, having a good starting point is crucial.

Increased Financial Opportunities:

Credit scores are considered by lenders, landlords, utility companies, and employers when making decisions. A high credit score enhances your prospects for securing loans, renting an apartment, and even qualifying for certain jobs. This opens up more financial opportunities, allowing you to fund big purchases, save on security deposits, and increase your eligibility for employment in certain industries.

Understanding credit scoring is essential for your financial well-being. By establishing and maintaining a high credit score, you can enjoy financial savings and increased opportunities. To view your credit score, you can check with your bank or use services like Credit Karma or annualcreditreport.com.

- Kyle McCune, CFP®, Worley Erhart-Graves Financial Advisors