A good credit score is one of the most important factors affecting your financial goals. From interest rates on loans and insurance premiums, to rental housing applications - that three digit number carries a lot of weight. So what exactly does your credit score say about you financially?
Your credit score is essentially a grade on how reliably you have paid all your bills and debts over time. The higher your score, the lower the risk you seem to lenders when taking on new debts. However, if you have a low score and bad credit, you can expect much higher interest rates, deposits, and limited options when applying for credit cards, mortgages, auto loans, and more.
How Your Credit Score Impacts Your Finances
Your credit score influence extends far beyond just qualifying for credit cards or loans. A low credit score can end up costing you thousands over time in higher interest rates alone. But it also spills over into housing, insurance, employment and more. Here's a breakdown of just how much your score matters.
Higher Interest Rates
For starters, a low credit score translates directly to higher interest rates on any new credit you are extended. While someone with an "excellent" credit score above 720 may get a new credit card at 15% APR, someone with a "poor" score below 580 can expect rates of 25-30%, or even higher. This means you'll pay an extra $10-15 per $100 borrowed every month.
That also applies to auto loans, mortgages, and personal loans. Going from bad credit to fair or good credit could save thousands in interest payments over the lifetime of a longer-term installment loan. And remember, the higher your loan rate, the more difficult it is to pay down debts – keeping you stuck in a frustrating cycle.
Rental and Mortgage Applications
Apartment complexes and mortgage lenders also rely heavily on credit score thresholds. Many will not approve applications below 640 or so. Some may require double deposits or advance rent payments for lesser credit scores. Again, a low credit score suggests a higher risk that you will fall behind on monthly housing payments. Fixing credit issues before applying for a mortgage or new rental is key.
Insurance Premiums
Your credit score also factors into insurance premium costs in most states. Auto insurance companies will give their lowest rates to those with excellent credit scores. Going from bad credit to good credit could save $100 or more per month. Life and homeowners insurance also offer better premiums for policyholders with higher credit scores.
Job Applications
Finally, many employers are now reviewing candidate credit backgrounds as part of the application process – especially for positions handling money. Poor credit may suggest higher odds that an employee might steal or commit fraud. While controversial, this practice has become more common across industries.
7 Steps to Improve Your Credit Score
Improving a bad credit score takes effort and consistency over time. But it's certainly doable in most cases by following these essential tips. Moving 100 or 200 points higher could save tens of thousands over your lifetime.
Pay All Monthly Bills On Time
Payment history makes up 35% of your overall FICO score. That's why the priority is ensuring every single bill gets paid before the due date. Set up autopay features when available and automatic transfers to bill payment accounts if needed. Even a single 30 or 60-day late notation can drop your score significantly. Multiple recent late marks are especially damaging.
Pay Down Balances
Your total debt balance and available credit ratio are the next biggest factors impacting scores. Let's say you have $10,000 in combined limits across credit cards and loans but a $5,000 balance. That's pushing a risky 50% credit utilization. Pay down balances to reduce this ratio. Getting below 30% utilization on all your revolving credit cards is an excellent target.
Limit New Credit Applications
Each new credit application triggers a hard inquiry on your credit reports. Too many hard inquiries within a few years can downgrade your score temporarily. Only apply for new credit when necessary while trying to improve existing scores. Also, avoid closing unused quality credit accounts as that can shorten your positive credit history.
Open a Secured Credit Card
If your score is under 600, approval for an unsecured card will be very difficult. But secured credit cards require a cash deposit that becomes their credit limit and acts as collateral against default risk. Charge a small monthly bill like gas or groceries to your secured card and repay on time. This will prove you can handle credit responsibility again.
Dispute Report Errors
It's critical to check all 3 of your credit reports from Experian, Equifax, and Transunion at least annually. If you find any errors negatively impacting your score - such as an incorrect late payment or unrecognized timely payments - you must dispute these promptly via certified mail to the bureaus. They are required to investigate and remove inaccurate information.
Seek Credit Repair Assistance
Reputable credit repair companies employ experts in credit law to help challenge unfair or unverifiable information dragging your score down. They send customized dispute letters on clients' behalf with supporting documentation. This is especially helpful if your reports contain multiple inaccuracies or you want to escalate a dispute case.
Review Reports Regularly
Once you've made progress correcting errors and improving payment activity, it's important to review fresh copies of all 3 credit reports every 4-6 months. This ensures no new inaccurate information appears that requires disputing. Ongoing monitoring also lets you track the positive score impact of your credit-building efforts. Expect to see incremental improvements monthly. But it takes 6-12 months of diligent effort to typically recover from bad credit damage.
How We Can Help You
The road to recovering from bad credit and improving your scores can certainly feel frustrating and isolating. But you don't have to handle it alone. At Philadelphia Federal Credit Union, our team is dedicated to providing personalized financial guidance and responsible lending options to help members rebuild and achieve their unique money goals. We can provide that extra level of support needed to get your credit back on track. In fact, staying on top of your credit has never been easier. As a PFCU member, you have access to Credit Score - our easy-to-use online and mobile banking platform. With Credit Score, you can access your score, full credit report, credit monitoring, financial tips, and education anytime, anywhere and for free.
Free Financial Counseling
First, we offer free financial counseling and credit coaching services through Clarifi. You'll be matched with a trained, compassionate financial counselor who can pull your current credit reports and have an honest discussion about what's working or what needs improvement. Together, you'll map out an action plan with reasonable timelines, manageable targets given your income, and the right mix of financial products and services here to aid your specific situation. Ongoing credit check-ins help you stick to positive changes.
Secured Card and Lending
Once you complete budget and credit counseling, we help members with appropriate lending if needed to consolidate existing high-rate debts. This alone can provide major monthly relief to rein in balances and bills. We also guide members with poor credit scores to open secured credit cards. This shows you responsibly handle revolving credit, make timely payments, and avoid further score damage from high credit card interest rates.
Direct Credit Bureau Reporting
As you demonstrate our ability to manage secured lending and credit cards from Philadelphia Federal Credit Union, positive payment activity gets reported directly to Experian, Equifax, and Transunion each month. This can have a beneficial impact on your credit history and FICO scoring algorithms. Within 6-12 months responsible members often graduate back to unsecured credit products and enjoy scores back over 700.
Bad credit can be fixed with diligent effort
Rebounding from bad credit may seem like an impossible uphill battle. The lingering effects of late payments, collections accounts, or even identity theft can keep credit scores depressed for years. But with the right game plan and support team, diligent effort can repair the damage over 6-12 months in most cases.
The starting point is accepting wherever your credit score stands today so you know realistic timelines to restore it to the 700+ excellence range. Get your full reports from national bureaus and note what factors currently hold back your scores. Common setbacks include high balances on revolving credit, past due notes, collection accounts, and incorrect personal information.
Arm yourself to handle finances more responsibly moving forward regardless of any past struggles. Commit to paying all monthly bills on their due dates going forward - even if that requires setting payment reminders. Additionally, create and stick to a budget that allows paying down credit card and loan balances below 30% of their limits within a year. Show lenders you can handle both fixed and flexible debts responsibly.
As your financial footing improves, avoid unnecessary new credit applications which only worsen your situation with added hard inquiries. Do apply for secured card products that help build a positive monthly payment history anew. Always dispute inaccurate late payments or collection accounts not recognizing your actual payment records.
At Philadelphia Federal Credit Union, our advisors provide personalized guidance and secured lending options to help members recover from credit setbacks. We help consolidate high-rate debts, offer manageable alternatives, and directly report your responsible financial progress.
