Love it or hate it, financial credit impacts just about everything. From long-term financial health to insurance premiums and many other important aspects of modern life in between, your credit score is an integral aspect of it all. Most of us understand that a good credit score is better than a bad one, but it’s not quite that straightforward. Get Smart About Credit Day serves as a good time to explore this to provide some insight into the factors that affect your credit and lay out a few simple steps to get you, or keep you, headed in the right direction.
Quick History of the Credit Score
The credit score is a ubiquitous yet mysterious aspect of our daily lives. It plays a role in many of the most significant decisions and moments of adult life, yet most of us have never thought how a three-digit number gained such influence. Credit reporting in the US goes back a few hundred years, and the concept of debt goes back thousands.
More modern credit reporting and the creation and computerization of consumer credit data emerged in the 1970s alongside the Fair Credit Reporting Act. This is when Equifax, Experian, and TransUnion (the Big Three of the consumer credit reporting agencies) began working with a tech company named Fair, Isaac and Company (FICO) to develop and implement a standardized credit score.
This just scratches the surface of the history of the credit score, but you can take a deep dive here if you want to learn more.
What Your Credit Affects
A good credit score opens more options for you when it comes to qualifying for a loan or taking out a credit card. And your score will also impact the interest rate that you receive on any money that you can borrow. In addition to the commonly known ways in which your credit is viewed, there are also a few lesser-known aspects of life affected by it.
- Employment – An employer will often look at your credit to assess any risks they might be taking on with hiring you. Your credit score does not come into play with a current or potential employer, but your credit report does. Employers cannot view your credit score on a report they request, and you must give written consent for the report to be pulled in the states where this is allowed.
Potential employers might base a hiring decision around how much debt you have, as high amounts or troubling situations can impact your judgment and actions as an employee. And if you already work for the employer, viewing these debts can prevent you from getting a promotion.
- Housing – Your credit score helps mortgage companies and other lenders decide on an interest rate for any loans that you receive for purchasing a new home. A higher score typically leads to lower interest rates, saving you lots of money over the course of a mortgage. And your credit is also commonly viewed by property owners when you apply to rent a home or apartment. If you have poor credit, you can be denied certain rentals or be asked for a larger security deposit.
- Larger Life Purchases – Common larger purchases such as vehicles also involve your credit if you plan to get a loan to buy a vehicle. Better credit affords lower-interest loans and other special offers from dealers. Smartphones are another consumer purchase where it’s now common for the buyer to pay off the cost of a new device over time rather than purchasing it outright. Carriers will look at your credit score or report to determine if you are eligible to make payments on a new phone, and the amount you might owe in an upfront payment can change based on creditworthiness.
- Utilities and Insurance – Even everyday necessities such as utilities and insurance can be affected by your credit. Utility companies might require a security deposit to set up a new account if you have poor credit. Insurance companies have their own method for determining premiums based in part on credit.
Factors Affecting Your Credit Score
Your paying your bills on time and avoiding large debts are obvious elements affecting your credit score. Payment history is the most significant aspect that can hurt or harm a credit score, but it only makes up a fraction of your overall score. Here are several other factors that come into play as well.
- Credit usage, or the amount of debt you currently owe versus how much available credit you have, is another big factor in determining your credit score. This makes up about a third of your score, and general advice is that you should strive to keep your credit usage rate below 30% for the best score.
- Credit history is the length of time you’ve had credit, and a longer history generally leads to a better score. The average age of all your accounts combined as well as your longest and newest account comes into play here.
- Credit mix is a smaller but still important piece of the puzzle. The types of credit lines you hold here will impact your score. A mix of credit cards, installment loans, mortgages, and other types of lending is what FICO and other agencies use to decide your score.
- New credit lines also have a smaller role in deciding your credit score. Opening numerous credit accounts close to one another can negatively impact your score because it is seen as a higher risk.
Credit and Cybersecurity
Cybersecurity risks and identity fraud are a constant threat to your credit. That’s why having identity theft restoration services in place is essential to help you navigate any issue with a seemingly limited impact on your credit score. However, everyone is likely to experience some type of fraud at some point, and even such minor situations can have a lasting effect on your credit if they are left unchecked. Keeping yourself informed of these risks and maintaining a watchful eye on your financial accounts are steps in the right direction. Still, simple credit monitoring services are not enough to limit the risk of fraud that can affect long-term credit health.
LibertyID provides expert, full service, fully managed identity theft restoration to individuals, couples, extended families* and businesses. LibertyID has a 100% success rate in resolving all forms of identity fraud on behalf of our subscribers.
*LibertyID defines an extended family as: you, your spouse/partner, your parents and parents-in-law, and your children under the age of 25.