Your Credit Score: What It Is, What It Means
To make sure you know where you stand, the first thing you need to do is get your credit score—you can get it for free, so there’s no excuse!—you’ll want to know what the number means because it may be the most important three-digit number in your life.
To get started, go to any one of the three major credit reporting agencies. They are:
In addition, there are great resources like WalletHub that give you free, daily updates on your credit score. You should also check to see if your bank offers free credit scores to their customers.
Your credit score is a measure of how on-time you were with your payments in the past. It ranges from 300 to 850, and your goal is to be on the higher end. To get a high score – above 720, the national average – you’ll need to have established a credit history of borrowing and paying off those lines of credit. But as we all know, those plastic cards are tricky: It’s so very easy to make common mistakes like racking up a big bill and not making even the minimum payment … and that can really ding your credit score. (Want to quiz yourself on your knowledge of credit scores and learn more? Kiplinger, a leading financial forecaster, has a fun and informative quiz here.)
Practically speaking, your credit score determines the kind of loan you qualify for, how much documentation you’ll need for a mortgage and what interest rates you’ll pay. It can also impact your eligibility for credit cards and your odds of getting approved for certain apartment or home rentals.
If you scored a…
740 and above: Nice! You have excellent credit and can land some of the best lending rates around. If you’re above a 760, even better: You can shop around and see who will give you the best deal, borrow a chunk of money to buy a home and even score a home equity loan or a credit card with a low interest rate.
675 to 739: Okay, pretty good, but you can do better. With a score in this range, you can still get a good rate on a loan. According to credit experts, on a 30-year fixed-rate mortgage, you’ll probably pay up to half a percentage point more than someone with a score above 740. And that seemingly small difference can cost you a lot of money in the long run, so taking steps to boost your credit score now is a very thrifty move.
620 to 674: This ain’t looking so good. You’ll have fewer options when it comes to getting a loan, and you will pay a premium for the privilege (sometimes even as much as 2% more than your buddy with the 760 credit score). There will also be a lot more paperwork to convince the lender that you’re going to pay back the money. Good news? If you make regular payments on your loan you can refinance for a better rate in the future and save money. Even better news? If you’re in your 20s, a lower score isn’t so terrible: You’ve got plenty of time to repair it, but it’s time to start now by paying off your bills and taking charge of your financial life.
Below 620: You don’t want to be here because below 620 you get that nasty name of “sub-prime” borrower. But you’re not alone: More than 30 million people in the US have credit scores below 620 that make getting loans and credit cards a challenge. This score doesn’t mean you can’t get a loan, but you’re going to pay a premium for it. On a home-loan, you’re looking at double-digit interest rates. It might also be harder to get a good rate on car insurance (insurance companies make some broad-brush assumptions about risk and don’t take too kindly to people with low credit score). Again, paying off the loan regularly and establishing better credit going forward means that you can refinance and save money down the line. Especially if you are young, a bad credit score isn’t the end of the world—but it won’t go away on it’s own.
Sites to Help You Boost Your Credit Score
Choose your credit card wisely. Check out NerdWallet, which is a great resource that has done a lot of the legwork for you.
Suze Orman’s website has great tools especially geared for young adults – a group she calls the “young, fabulous and broke.” Check out her debt eliminator program.
Credit Repair also has some great resources, especially if you’re a student or you have debt.
Check out some resources on how to be more thrifty, like the thrift chapter of Generation WTF or a financial guide devoted to the needs young professionals, Generation Earn.