When a Credit Score Matters – and When It Doesn't

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You probably have heard a lot about credit scores in your lifetime. Having good credit is an important part of your overall financial wellness. A good credit score can make it easier to do things like borrow money, lock in better home and auto insurance rates, qualify for lower credit card interest rates, and more. However, there are also many areas of life in which your credit scores aren't considered at all.

Let's take a closer look at what credit scores are, when they matter, and when they don't.

What Is a Credit Score?

A credit score is a three-digit number that creditors look at and use as a measure of how likely you are to pay your bills on time. 

A credit score is nothing you have to actively go and get for yourself. You'll actually start to establish a credit score and a credit history the first time you take part in any transaction that involves credit or any kind of payment plan to a business. For example, if you sign up for a credit card or a cell phone plan or you buy a car or get a loan from a bank, you establish a credit score. (Your credit score may also be referred to as your FICO score.)

A credit score ranges from 300-850 and changes based on factors like debt, how long you've had a credit history, and how reliable you are at paying your bills on time. Paying bills on time makes your credit score higher. Paying your bills late or defaulting on them will lower your credit score. 

Creditors and lenders value a higher score over a lower one because it indicates to them that you are more likely to pay them back what you owe them on time.

Credit Score Ranges 

FICO breaks down credit scores using the following scale:

  • 800-850 – Exceptional
  • 740-799 – Very Good
  • 670-739 – Good
  • 580-669 – Fair
  • 300-579 – Very Poor

When Your Credit Score Matters

There are many ways in which your credit score will affect your financial wellness.

  • Getting a credit card. Even though you may have established a line of credit by getting a credit card, having a low credit score could cause you to be declined when you apply for a new one. That's because credit card issuers will look at your credit history (on-time and correct payments and amounts for two years or more), your current income, and whether or not your credit score meets their minimum requirements. Having less debt and a higher credit score will help your chances of being approved for more credit.
  • Buying or renting a home. Odds are, if you are buying a house, you'll need to get a mortgage from a bank. Banks will require a good credit score to qualify you for a mortgage and to secure you the best (lowest) interest rates. (Mortgage rates and loan types vary by lender.) Renters will also discover that homeowners often run credit checks on applicants prior to lease approval. While there's no general set credit score required to rent, owners are more likely to approve higher credit scores than lower ones, depending on the type of property in which you're interested.  
  • Buying or leasing a car. Just like your credit score affects whether or not you can get a loan on a house, it also matters when trying to buy or lease a car. The same factors will come into play when trying to get a line of credit for a car: The better your credit score, the better the interest rates and terms you'll receive.
    In addition, bad credit can drive up your auto insurance rates.
  • Applying for a line of credit. A line of credit is an open-ended, flexible loan given out by a bank or other financial institution that consists of a defined amount of money that can be drawn upon as needed by the borrower.
    Just like any other financial transaction that involves borrowing money, your credit score will come into play here. The higher your credit score, the more likely a lender is to approve a line of credit for you with more favorable rates.

When Your Credit Score Doesn't Matter

It may seem like your credit score is the be-all and end-all for your finances. While it is a universal way in which many lenders check for fiscal responsibility, there are many things your credit score doesn't do.

Your credit score doesn't:

  • Affect your hiring status. Employers can run a background check on you before hiring, which can include your credit report. A credit report shows your credit history, including your credit cards and loans and whether or not you've made your payments on time. Background checks do not include your credit score, nor do they affect your credit score.
  • Make you a good or bad person. Credit scores can only calculate your past financial situation. It doesn't consider any extenuating circumstances, and whether or not you are a good person.  
  • Determine your future finances. A credit score only shows a creditor your credit past. They use that as future predictor of how or when you will make your payments to them in a financial exchange. You can work on your credit score to change it for the better at any time.
  • Affect your spouse's credit. Your credit score and your spouse's credit score can never be merged, and one doesn't affect the other.

Next Steps:

Even if you have poor credit today, there are steps you can take to improve it for the future.

To learn more about your credit score or to increase your credit score or if you have other questions surrounding your finances, head on over to the Finance 101 section of our website to learn more.