Your credit score is a reflection of your financial wellbeing. Credit scores range from 300-850, calculating the likelihood of being 90 days past due on a debt in the next 24 months. The scoring model is quite complex, taking so many factors into consideration that it’s nearly impossible for a human to calculate.
Almost any loan you apply for at a financial institution will require a credit check and application that takes into consideration your credit history, current income, current debt, and sometimes employment and housing stability. In many cases, your score is what determines the interest rate you will pay on that loan. Fixed rates are based on your score at the time you apply; variable rates can change over the life of the loan as your score changes.
Terry McCoy, Senior Training Coordinator of Amplify Credit Union, visited K-Eye's "We Are Austin" to talk about the importance of knowing and maintaining one's credit score. Watch the video here:
Opening Credit Accounts
Credit cards, lines of credit, and other credit accounts that let you re-borrow up to an approved limit are referred to as revolving accounts. Revolving accounts generally come with a variable rate, and the payment can change as your balance fluctuates. A good rule of thumb to follow with revolving accounts is the 30% Rule: Keep revolving balances at 30% or less of all your limits.
In other words, if you have 3 cards with limits totaling $10,000 combined, it would be best to keep your combined balances at or below $3,000. This not only helps your credit score, it also leaves availability in case of unexpected expenses (like car repairs or medical bills).
It’s also a good idea to pay well above the minimum payment due if you are trying to bring down a revolving balance. If your balances sit at high levels or close to the limits, you risk your score tipping downward and possibly causing your interest rate to increase. This may add to the amount of time it will take you to pay off the balance.
Obtaining Installment Loans
Installment loans differ from revolving accounts, as they are not open lines of credit that allow you re-borrow up to your approved limit. Rather, you receive the full loan amount up front, and then you pay back the loan by making regular monthly payments over the course of the term, until the balance is paid in full.
Mortgage loan applications can be more complex, sometimes requiring extra verification of income, multiple credit pulls, and other types of authentication. And depending on how much of a down payment you are prepared to make, you may be faced with mortgage insurance, making your payment even higher. Going into the mortgage application with a healthy credit score and profile will help you qualify for a lower monthly payment overall.
In addition to having low rates on loans and credit cards, a healthy credit score can also land you better premiums on car insurance, home insurance, renters’ insurance, and other similar financial products. Keep these insurance rates in mind, since financing an auto or home will require you to maintain policies to cover the collateral.
In general, it’s a good idea to review your credit report annually to know where you stand, check for errors, and address possible concerns before they get out of control.