Many people don’t think about their credit scores. They even avoid building or fixing their credit. In fact, 25 percent of Millennials don’t even know what a credit score is. But in when it comes to credit, what you don’t know—or what you avoid—can hurt you.
Your credit score is a fluctuating number that can cost or save you a lot of money and stress over a lifetime. If you ever want to qualify for a mortgage to buy a house, borrow money to start a business, purchase a car or pay off student loans or need money for life’s unexpected bills, you need good credit. All lenders—and even some employers, potential business partners, investors, and landlords—look at your credit score.
If you have no credit or bad credit because you’ve been avoiding it, it’s costing you more than you think. Here’s how.
What is a credit score?
Your credit score is a number that represents your personal financial situation and history at a certain point in time. It’s also called a Fico score and ranges from 300 to 850. Generally speaking, the higher the credit score, the better your credit—and the lower the risk for potential lenders. Excellent or good credit often means you’ll be approved for a greater loan and at a lower interest rate.
Lower credit scores, bad credit, and no credit are riskier for lenders. If you have bad credit, you may have difficulty getting a loan and you’ll likely receive less money than you hoped for and at a higher interest rate. Having no credit history means that you have nothing on your credit report. You haven’t borrowed money or used credit cards, lines of credit and so on in the past (or last seven years). Just like bad credit, having no credit will affect your chances of getting a loan and takes time to build up.
What factors affect credit scores?
Your credit score is calculated based on a number of key factors. The main one being your credit history. This represents your ability to demonstrate responsibility in repaying debts. Your credit history includes:
- How many credit accounts you have
- Variety of credit types (credit cards, lines of credit, student loans, store credit cards, etc.)
- How long you’ve had each credit account for
- How much you owe on each account
- How much available credit you’ve used
- If you pay bills on time (in full and/or make monthly minimum payments)
- How many times you’ve recently inquired about your credit (every time hurts your credit)
How credit can save you money and stress
Excellent credit is 750 and above, whereas Good credit is 700 to 749. These scores can open more doors in life, giving you lower interest rates and higher loans, which could save you hundreds or thousands of dollars, depending on your loan. The old saying that the rich get richer can have a loophole: excellent credit score.
How credit can cost you money and stress
If you have bad credit, that is, a score of 579 or less, the complete opposite is true, as we mentioned. Companies, lenders and investors may be unwilling to work with you if you have bad credit. You’ll likely be approved for less money and at a higher cost, meaning your mortgage rates or monthly payments may send you deeper and deeper into debt and bad credit. Or, you may not get approval for the loan and then there goes your dream house, for example, to someone who could get the financing.
How to fix bad credit and build credit from scratch
Having no credit is easier to fix than bad credit, however. With bad credit, you have to work hard to pay off your debts on time and show that you are a reliable and trustworthy borrower. This costs time, money, effort and requires planning and diligence. Building credit from scratch, on the other hand, requires you to set up credit-building accounts and begin using them responsibly. This also takes time, money and effort, but can land you a better score sooner.
Looking beyond credit history for credit scores
At Progressa, we look beyond your credit history and traditional credit score to develop a score that gives us a fuller financial picture of you. Unlike other lenders, we look at data like your bank statements, employment history, and earning potential. We also conduct an interview to go through your monthly budget and make sure our loans make sense for you.
Regardless of how you choose to build your credit, start now. Avoiding credit may be costing you now and in the future.
The author Sam Milbrath
Sam Milbrath is a freelance copywriter and brand marketer. When she isn’t writing for brands or doing her own creative writing, she’s exploring, taking photographs, gardening and doing pottery. Check out her work at www.sammilbrath.com