Understanding Credit: A Score that Impacts Everything from Your Cell Phone Bill to Car Insurance
Uncover the significant impact that credit scores have on your financial well-being and beyond. From securing lower car insurance rates to unlocking better cell phone plans, understanding the dynamics of credit is essential for a brighter and more secure financial future. Dive deep into the intricate connections between credit scores and various aspects of your everyday expenses.
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Brad Larson
Licensed Insurance Agent
Brad Larson has been in the insurance industry for over 16 years. He specializes in helping clients navigate the claims process, with a particular emphasis on coverage analysis. He received his bachelor’s degree from the University of Utah in Political Science. He also holds an Associate in Claims (AIC) and Associate in General Insurance (AINS) designations, as well as a Utah Property and Casual...
Licensed Insurance Agent
UPDATED: Oct 4, 2024
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Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.
UPDATED: Oct 4, 2024
It’s all about you. We want to help you make the right coverage choices.
Advertiser Disclosure: We strive to help you make confident insurance decisions. Comparison shopping should be easy. We are not affiliated with any one insurance company and cannot guarantee quotes from any single insurance company.
Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
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Welcome to our comprehensive guide on understanding credit and its far-reaching influence on your financial landscape.
In this article, we delve into the intricacies of credit scores, emphasizing their significance in a variety of areas, ranging from your cell phone bill to car insurance rates.
We explore key topics such as how credit scores are calculated, the factors that contribute to a good score, and the implications of credit on loan approvals and interest rates. Additionally, we shed light on the connection between creditworthiness and insurance premiums, highlighting how a higher credit score can potentially lead to more favorable rates.
To empower you further, we offer a simple yet compelling call-to-action: enter your ZIP code to compare rates from the top insurance providers in your area. Armed with this knowledge and the ability to compare rates, you can make informed decisions that optimize your financial well-being.
What is a Credit Score?
A credit score determines your creditworthiness and ability to manage debt responsibly. It is generally based on your credit report, or reports, from any of the major credit bureaus. A higher score comes from having a longer credit history that includes paying your bills on time and working towards paying off debt. A lower score may include late payments, charge-offs, or a short credit history.
Resources:
- Federal Trade Commission: Credit scores
- State of New Jersey, Department of Banking and Insurance: What is a credit score?
- Federal Deposit Insurance Corporation: Credit report basics
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Who Calculates Your Credit Score?
In the United States, your credit score is calculated by Experian, TransUnion or Equifax, which are the three main credit bureaus. They base it on the information that they collect for your credit report. That information includes money you have borrowed and any credit accounts that you have open as well as any liens or judgments. It does not include employment or criminal history.
Resources:
- Federal Reserve Consumer Help: Credit reports and scores
- Skyline College: Credit report review and credit score
How is Your Credit Score Calculated?
The primary type of credit score is the FICO score. The general-purpose score can be anywhere between 350 and 800, but an industry-specific score (such as those used by mortgage lenders) may have a range from 250-900. The quality of your payment history makes up approximately 35% of the score. Your debt level makes up the next 30%. The length of your credit history is 15% of your score, inquiries are 10%, and the type of credit mix that you have makes up the final 10%.
Resources:
- Minnesota Commerce Department: Understanding your credit report
- New York State, Department of Financial Services: Understanding your credit report and your credit score
- Oklahoma Public Employees Retirement System: Understanding your credit score
When is Your Credit Score Used?
Your credit score may be used when you apply for anything that includes lending, financing, or trust. Credit scores have been used by potential landlords, mortgage lenders, credit card companies, insurance companies, the government, banks, credit unions, human resources departments, mobile phone companies, and more. In addition to having your credit score checked when you first apply for these things, in some cases, lenders may continue to evaluate and check your creditworthiness before increasing or decreasing credit lines.
Read more: Credit Union Car Insurance Discount
Resources:
- State of Michigan: Credit reports and credit scores
- Mississippi Insurance Department: Credit scoring: How does it affect you?
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How to Build Your Credit
There are many things that you can do to improve or build your credit if you don’t have much of a credit history established yet or if you do but it’s more negative than positive.
- Apply for a secured credit card
- Get store credit cards
- Have someone make you an authorized user on their credit card or line of credit
- Get a cosigner to help you get a credit card or loan
- Make your payments on time
- Use credit responsibly
- Pay more than the minimum on your credit cards
- Keep accounts open to establish a longer history
- Check your credit reports regularly for inaccurate information
Resources:
- Hampshire College: Steps to help build a solid credit history
- Florida’s Center for Child Welfare: Creating a credit profile: How to build your credit
Establishing Credit History
Teens under 18
It’s possible to start building, or preparing to build, your credit score before you are 18. Here are a few things that you can do to get started:
- Get a job so that you can meet the income requirements for a credit card
- Open a savings or checking account to begin to establish a banking history
- Have a parent add you as an authorized user on a secured credit card
- Learn good financial habits early on to avoid making mistakes
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Young Adults
- Apply for a credit card, student credit card, or secured credit card that you are most likely to qualify for
- Apply for a store credit card
- Avoid applying for too many credit cards at the same time. Too many inquiries can temporarily damage your credit score.
- Make payments on time
- Keep a low balance on your credit cards
- Pay on time
- Get a loan
Resources:
- Stop Fraud Colorado: Why is having good credit history important?
- California State University Channel Islands: Credit score 101
Monitoring Your Credit Score
To get free government-authorized annual credit reports, visit annualcreditreport.com. To see your score and reports more frequently, visit Experian, Equifax, or TransUnion online and sign up for one of their credit monitoring services.
Resources:
- AnnualCreditReport: Main page
- Consumer Financial Protection Bureau: Where can I get my credit score?
- gov: Credit reports and scores
Managing Your Credit
To manage your credit, begin by making sure that the credit cards you have provide the lowest interest rates for your financial situation. In some cases, it may make sense to transfer the balances of high-interest credit cards over to low-interest ones. Try to avoid cards that come along with annual fees or other hidden expenses. In addition, make sure to pay your bills on time to avoid late fees and having your interest rate increased.
Be sure to check your credit report often. If you find any discrepancies, contact the credit reporting agency to have them removed or adjusted.
Always pay more than the minimum on your cards and try not to use them except when necessary. Maxing out your cards may result in a lower score and harder to control debt. Making good choices now will pay off in the long run with an improved score and more manageable finances.
Resources:
- University of Georgia: Understanding your credit score
- University of Colorado: Credit score management seminar
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Repairing Bad Credit
Repairing credit can take time, but it is possible. Start by setting payment reminders to avoid any future late payments. Always pay more than the minimum and begin to work on paying off debts rather than moving the debt around. In some cases, it may make sense to tackle smaller debts first and then move on to working on the larger sums.
If you feel that tackling debt on your own is too time-consuming or too daunting, you can also consider working with a credit repair company. Keep in mind that these services will come at a price. However, for some, it will be a small price to pay to finally walk in financial freedom.
If you are still struggling, consider speaking to a credit counselor or claiming bankruptcy, depending on your situation. While bankruptcy will damage your credit score, it also gives you a chance to clear out many of your monthly debts and start over, hopefully, more wisely the second time. It’s never too late to start actively managing your credit score.
Resources:
- Federal Reserve Board: 5 tips for improving your credit score
- State of California, Department of Justice: Credit scores and credit reports
- University of Illinois: Use credit wisely
Frequently Asked Questions
What is credit?
Credit is a financial term that refers to an agreement in which a borrower receives something of value (such as money) in exchange for a promise to pay it back with interest at a later date.
What is a credit score?
A credit score is a number that is used to evaluate a person’s creditworthiness based on their credit history. This score is used by lenders, insurance companies, and other entities to determine the risk involved in lending or doing business with that individual.
What is a FICO score?
FICO score is a type of credit score that is widely used by lenders to determine a person’s creditworthiness. It is based on information from credit bureaus and ranges from 300 to 850.
How is a credit score calculated?
A credit score is calculated based on various factors, including payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries.
Why is a good credit score important?
A good credit score is important because it can impact many aspects of your financial life, including the interest rates you are charged on loans and credit cards, the amount of credit you are able to obtain, and even your ability to rent an apartment or get a job.
How can I improve my credit score?
There are several ways to improve your credit score, including paying your bills on time, paying down your debt, keeping your credit utilization low, and avoiding opening too many new accounts at once.
Compare The Best Insurance Quotes In The Country
Compare quotes from the top insurance companies and save!
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Brad Larson
Licensed Insurance Agent
Brad Larson has been in the insurance industry for over 16 years. He specializes in helping clients navigate the claims process, with a particular emphasis on coverage analysis. He received his bachelor’s degree from the University of Utah in Political Science. He also holds an Associate in Claims (AIC) and Associate in General Insurance (AINS) designations, as well as a Utah Property and Casual...
Licensed Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.