Dear 3Rivers: How Important is My Credit Rating, Really?

Dear 3Rivers,

I made it a goal of mine this year to better understand finances in general and start getting out of debt. One of the main pieces of personal finance know-how I keep running across is the significance of having a good credit score. I guess what I’m confused about is how important a good credit rating really is.

Here's why. Personally, I don’t know where mine stands and truth be told, I’ve never checked. I know it can’t be that great because I’ve missed and ignored payments on my bills, and wasn’t focused on managing my money for the first several years after graduation (I just turned 30.) Anyway... even so, I’ve still been able to rent apartments, get a car, get approved for credit cards, and take out loans. What gives? What is (probably) a pretty low score hasn’t stopped me from getting what I need, so should I focus any attention on improving it?

-Credit Clueless

Clueless,

We’re so excited to hear that you’re working on bettering your financial situation! We’ll hit on your last point first: Yes, you should absolutely focus your attention on improving your credit score. In fact, much of what you’re likely already doing to improve your finances in general is probably helping to improve your rating.

If you’d like an in-depth look at how your credit score is determined by FICO, and how you can work to improve it, check out our post on Credit Scores 101.

Now, to address your confusion about the ability you’ve had to get approved for things like cars, credit cards, and rentals, even with bad credit. Essentially what your credit score tells lenders, landlords, and dealerships is whether or not you’ll be a monetary risk to them – whether you’ll be able to pay back your debt to them on time, or at all. While a low credit score might not stop them from letting you borrow money or lease from them, it will very likely cause them to raise the rate of interest you’ll owe for their own security, as opposed to someone with a better credit score.

This means that, over the course of time, and even monthly, you’ll be paying far more for the same product or item than someone with a score higher than yours.

In addition, if your score is terribly low, you might find it difficult, if not impossible, to actually buy a car or purchase a home at all. If these are future goals of yours, then it’s crucial that you improve and maintain a good credit rating.

A credit score ranges from 350-850. Anything above 700-750 is considered to be a great, low-risk score. Anything below 600 is considered higher-risk, and if you’re 350 or below, you’re probably experiencing some major, major trouble when it comes to borrowing money.

We encourage you to check your credit report annually. This will allow you to see where your score is at and catch any suspicious activity (should any fraud occur, you can dispute it.)

Your score is calculated by FICO, who takes previous credit performance, current amount of debt, length of credit history, types of credit, and pursuit of new credit into account to determine the overall rating.

A few steps you can start taking to improve your score:

• Pay your debts (bills, loans, credit cards) on time – and if possible, at more than the minimum amount.
• Avoid overextending your credit. Shred and toss those credit card offers that flood your mailbox.
• Do NOT ignore your bills. If you can’t make that month’s payment, call your creditor to see if you can skip a payment or make some alterations to help you out.
• Don’t max out your revolving credit. A good rule of thumb is to utilize only 20-30% of your available card balance (if you have a card with a $1,000 limit, try to keep what you’re using around $300.) And pay them down regularly and on time.
• Limit your number of credit applications (or having your credit report pulled.) If you’re going to get approved for a car loan, for example, don’t have your report checked at every dealer. Every "hard inquiry" knocks a few points off your score. Visit your financial institution, have it pulled once, and take it with you. Keep credit checks to a minimum.

Keep in mind that while your credit rating can be damaged quickly, it will take much, much longer to repair. Creditors are more interested in a long-time, good credit history rather than a short period of maintaining a good score. Keep at it and be patient – having a good rating will (literally) pay off in the end!

Sincerely,

3Rivers

RELATED | Credit Scores: How They're Calculated + How to Improve Yours

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