Most of the time, we don’t think about our credit score until we need to know it. Many of us don’t even know what our score is. Yet, by the time we need to know our score to qualify for a loan, it’s too late to raise it.
The good news is you can keep your credit score top of mind without overthinking it. The Leaven spoke with accounting and finance professional Mike Meurer, a member of Good Shepherd Parish in Shawnee, for some practical tips.
Q. What does a credit score tell you?
A. A credit score indicates to lenders a person’s ability and risk factors to pay their bills or loans. The higher the credit score, the more likely the person will pay his or her bills, and pay them on time. Higher credit scores also give you greater loan power. A low credit score indicates you have a history of late payments or inability to repay a loan or bills.
Q. Why is it important?
A. We live in a world that relies on credit. Not only do banks loan money, but utility companies (water, gas, electric, phone) essentially bill after the service has been provided. Therefore, these companies rely on the individual’s credit scores when determining their ability to pay bills. Additionally, banks rely heavily on credit scores to loan money for houses, cars, student loans, etc.
Q. At what age is a credit score most important?
A. Credit scores are not necessarily an age question. Instead, it depends on the needs of an individual. Theoretically, you can say it is more important for younger people to monitor their credit scores because they are starting out with new jobs, buying their first house, having kids, etc. Older people are typically on the back end of their mortgage, their kids have graduated and they have saved for the future.
However, in reality, as you get older, you may find you need to borrow money to cover a health care issue, or you may want to lease a car, rather than purchase one. So, it is important to maintain a good credit score all the time.
Q. How is your credit score determined?
A. A credit score is primarily determined on timeliness of bill payments. Most, if not all, utility companies report to the credit agency. All banks do as well. If you are late on a payment, then most likely it will get reported to the credit agency. Some creditors may have grace periods, but if those grace periods are consistently abused, it will be reflected in your credit score.
Also, having too many credit card accounts, with high balances or high availability, can affect the way the credit agencies evaluate the individuals.
Q. How many credit mistakes can a person make before it affects your credit score?
A. Credit scores are definitely affected by the number of mistakes (missed and late payments) you make. The more mistakes, the harder it will be to get your higher score back. Even one missed or late payment can affect the score slightly, but it won’t take long to get your score back to where it is if those mistakes are rare.
However, in the case of multiple missed and late payments, your score can be affected significantly and will take longer to get it to a high number.
Q. What are the consequences of having a poor credit score?
A. There are two primary consequences of having a poor credit score. First, it affects your ability to get loans, and secondly, if you were able to get a loan, most likely it will be at a high interest rate. With a good credit score, you can typically negotiate a better interest rate.
Q. How can you improve your credit score?
A. With today’s technology, it’s easy to avoid missed and late payments by setting up automatic bill pay. These are scheduled payments you set up through your bank. Aim for scheduling the payment one day before it is due. The other thing you can do is to pay off credit cards in full — also one day before it is due. Don’t be late and be vigilant about paying off the credit cards.
Additionally, there are many online tools that can help improve your score. However, make sure to use a reputable service.
Q. What is the credit score scale?
A. Typically, credit scores range between 300 to 850, with 850 being the highest. The normal range for a good credit score is between 700 and 750.
Q. Any last words of advice?
A. With the internet, there are many articles and resources to help people build their credit. Additionally, there are other resources, such as financial planners, that can help. With the economy being strong, but credit card debt at an all-time high, it takes discipline and sacrifice to build up a credit score.
However, once you are there and it becomes routine, then it’s easy to keep it high.
Mike Meurer is the CFO of Freeman Holdings Group in Overland Park. He is active in both his community and his parish and has previously held positions on Good Shepherd’s finance and parish councils.