What your credit score means, and why it's so important

What your credit score means, and why it's so important

Tools

Story Published: Jul 11, 2008 at 4:50 PM PDT

Story Updated: Nov 20, 2008 at 11:02 PM PDT

By KOMO Staff

Audo Icon Listen
Watch the story
It's funny. We all know our credit score is important, but a lot of people don't really understand what it all means.

That's the conclusion of a study conducted for the Consumer Federation of America and Washington Mutual. The results were released this week.

So let's go through the basics to make sure you're up to speed on how credit scores work and why a good score is so important.

A credit score is a number that tells lenders what sort of risk you'd be if they gave you a loan. To come up with that number, a variety of factors are considered.

Key factors that affect your credit score

Do you pay your bills on time? Make a monthly payment more than 30 days late, and it will lower your score.

What's the ratio of credit used to available credit? If you are close to your credit limit, your score drops. Maxing out on credit lowers your score. Paying off a large debit balance boots it.

How long is your credit history? The longer the better, if that history is positive. It can take years for a ding to drop off your report.

Factors that do not affect your credit score

There are things that do not impact your credit score, even though a lot of people think they do. Income, marital status, where you live, your level of education and your race are not used to generate your score.

Why is it so important to have a good credit score?

Because it affects so many aspects of your life these days.

Credit scores are used to determine if you qualify for a credit card, mortgage or other loan. And if you do, what rate you'll pay.

Let's look at what might happen when you apply for a home loan. If you score is above 760, you'll get the lowest rate. Above 700 and you'll get a prime rate, which is just a bit higher. But if your score is below 600, you're in sub-prime loan territory, which means you'll pay a full percentage point more for that loan, if you can one.

Credit scores are also used by landlords, potential employers, insurance companies, cell phone companies and utilities.

One of our producers here at KOMO News just moved, and he told me that because he had a good credit score, he didn't have to put down a deposit with the electric company. That saved him $184 out of pocket.

Ways to boost your credit score

There are several things that will work. Pay your bills on time every month. Set up a system to make sure you don't miss the due date.

Don't max out or even come close to the credit limit on your credit cards or other charge cards. That counts against you.

Try to pay off debt. That lowers your credit-to-debt ratio, which boosts your score.

Check your credit report. You want to look for any mistakes that might be dragging down your score. You get a free report once a year from each of the big three credit reporting agencies.

More information:

About credit scores

Your credit scores

Not all credit scores created equal

Your credit score: How it all adds up

9 ways to build credit from scratch

THE ONLY PLACE TO GET YOUR FREE YEARLY CREDIT REPORT

Weather & Traffic

Icon
Current Temp 64.0 °F
A Few Clouds
More Weather

Weather & Traffic

More Weather

On Demand

Resources and info you need to prepare for the switch to DTV.

Stay Connected

YouNews

This content requires the latest Adobe Flash Player and a browser with JavaScript enabled. Click here for a free download of the latest Adobe Flash Player.

Marketplace