How Your Credit Score Impacts Your Financial Future

Building a credit score isn’t just a nice goal to have. It can shape many vital aspects of your life, from where you live, to the jobs you get, to the loans you can be approved for. Your credit score is used as an identifying mark for your financial reliability, and anyone doing a background check for personal, professional, or financial reasons will check your credit score at the same time.

This means that your credit score can profoundly impact your life today and your long-term financial future. Working on your credit score now can help you thrive in essential areas of your life and access greater opportunities to build wealth.

What Are the Credit Score Ranges?

Credit scores range from 300 to 850, where 300 is considered a very poor credit score and 850 is an excellent credit score that will open doors for you. Those without a credit score typically begin around 550 when they take out and use their first credit card or loan. Let’s take a closer look at what each credit score range means.

• Poor: 300-579 - A poor credit score typically represents large amounts of debt and/or delinquent accounts. Those with a low credit score often find fewer than average financial, housing, cell phone, and even job opportunities available to them and often must go through credit rehabilitation.
• Fair: 580-669 - A fair credit score is someone who pays their bills on time but may have a large amount of managed debt or a few missed credit card payments. Fair credit scores are normal, especially for young professionals and those who have experienced financial hardship.
• Good: 670-739 - A good credit score reflects a low amount or fully managed and timely paid debts. You may have a mortgage or car loan paid regularly and credit cards that are rarely if ever, maxed out or paid late. Those with good credit scores may have a few blips on their report or one or two delinquent accounts.
• Very Good: 740-799 - Very good credit suggests completely managed debt, timely credit and loan payments, and other factors like long credit history or several large and completely paid off loans, which positively reflect on your financial ratings.
• Exceptional: 800-850 - An exceptional credit score can only be reached by combining multiple credit-building strategies, including the age of your accounts, completed loans, active credit cards, and recent activity.

What Determines a Good Credit Score?

Most Americans have a good or better credit score but can raise their credit scores with a little focused effort and good financial habits. The more you can raise your credit score, the better opportunities will become available to you. Here is what the credit scoring agencies look for:

• Age of accounts
• Mixed types of credit accounts: Loans, lines of credit, credit cards, mortgages, etc.
• Payment history
• Recent activity
• Credit usage
• Recent or new credit

By strategizing for these factors on your credit history, you can boost your credit score quickly and over time.

How Your Credit Score Affects Home Loan Applications

Any time you apply for a loan, especially a mortgage, the lender will look at your credit score. It is their job to issue mortgages only to people who will most likely be able to pay the mortgage every single month for ten to thirty years. They don’t want to see homeowners get foreclosed on - and they don’t want to put the bank at risk by issuing loans that won’t be fulfilled.

Your credit score is supposed to act as an indication of how financially responsible you are. If you can pay your credit cards or car note on time, then you are more likely to also be able to handle a mortgage.

A higher credit score will not only get you approved by more mortgage lenders but you will also be offered lower interest rates as your credit score rises.

Preparing Your Credit Score to Buy a House

When planning to buy a house, you want to build your credit score as well as save up your down payment. First, take a look at your credit score from all three of the major credit reporting bureaus; Experian, Equifax, and TransUnion. You have no way of knowing which your next lender will check, and each calculates your credit score a little differently.

Be aware, however, that when a lender checks your credit for a lending decision they note this on your credit as a hard inquiry, or "hard pull. Too many hard pulls can have a slightly negative impact on your score, so you only want to apply for a loan when you are actively on the market so as not to reduce your credit during the lead-up to closing.

How Your Credit Score Affects Vehicle Loan Applications

If you are in the market to buy a new vehicle, your credit score also plays a major role. Most people don’t buy their vehicles outright with cash. Vehicle loans make it possible to pay off the full amount in a few years. But the size of the loan and interest rate you receive determine your purchasing power when selecting a vehicle.

Whether you are looking to buy a new car, boat, or recreational vehicle, a credit check will be conducted, and your credit history will be considered by any potential lender. This will sway their decision on your eligibility for a loan, how much they can borrow, and the interest rates available to them.

Vehicle Loan Pre-Approval

However, there is a way to test the waters when financing a new vehicle. Your first step should be to apply for loan pre-approval. Unlike a direct loan application, pre-approval is a soft inquiry (also known as a "soft pull") and, unlike hard inquiries, does not affect your credit score. Applying for pre-approval and coming to understand your current borrowing limit can be done with a lending agent to provide pointers for your best follow-up strategy.

This can help you find the car you want while staying within your lending budget. Once you have pre-approval and find the vehicle you want to purchase, you can continue to complete the vehicle loan and handle that one hard credit check simultaneously.

Other Ways Where Your Credit Score Can Impact Your Life

Your credit score can have an impact on other major areas of your life, as well. Did you know that employers look at credit scores when evaluating your job application and that landlords can check your credit score when considering your lease application? Even service providers will consider your credit score when offering you a customized plan.

Job Applications

Depending on the sector, type of work, and responsibilities, many jobs may include a credit check in the hiring process. In fact, it’s considered standard operating procedure, and many hiring services provide credit check results automatically.

Potential employers will use your credit report and/or credit score to determine how well you make decisions, how reliable you are, and even if you have an increased risk of criminal behaviors like theft or fraud due to financial distress. Jobs that handle finances or vulnerable populations are more likely to face credit checks than other positions.

Renting or Leasing

Landlords are always seeking people who will pay the rent reliably and won’t damage the property with irresponsible behavior. For this reason, landlords often use a credit score to determine if a potential tenant will pay on time and is responsible with their finances.

Having a better score and a healthy credit report could mean the difference between being approved for a new apartment/condo or having your application rejected.

Service Providers

Even service providers may offer you a less favorable quote if you have a lower credit score - or a more favorable package if you are a higher score customer. Setting up an account with a utility or cellphone provider sometimes requires credit checks to determine possible issues in paying your monthly bill. These providers look for applicants with good borrowing histories and often provide better deals or lower prices/reduced deposits when starting a new account to those that do.

The Bottom Line

What it really comes down to is that your credit score is important. Not just for loans, not just as a nice-to-have personal rating, but in many vital aspects of your life. Where you can live, work, what you can buy, and the opportunities you are offered can all be shaped by your credit score.

This is why it’s never too late or too early to work on your credit score. A good credit score and a healthy credit history can set you on the right course to achieve your financial goals

There are tools available for those struggling to improve their credit score. Join us in our next article as we explore the ways to raise your credit score and repair a damaged credit score after financial hardship.