You likely know your credit score is important, and you might even know your current “number”. However, many people simply do not focus on their credit profile until the exact moment they need it. By delaying this focus, you overlook the opportunity to build a solid financial asset that you can leverage for both major and minor life decisions.

A Good Score Is A Good Investment

Your credit score is not just for buying a house or financing a car; it is evaluated by a wide range of entities, from potential landlords to your cellphone carrier. While a lower score might not result in an outright denial, you will absolutely be charged higher interest rates.

According to 2020 data analyzed by the credit-building company Self Financial, the lifetime cost difference between having “Good” credit versus “Excellent” credit is more than $35,000. The cost penalty of having “Poor” credit? More than $400,000. High credit scores signal to lenders that you are a low-risk borrower. Consequently, lenders are willing to actively compete for your business by offering their lowest possible interest rates.

Credit Score vs. Credit Report

It is important to understand that your credit score is different from your credit report.

• Credit Reports: The major credit reporting agencies (TransUnion, Experian, and Equifax) compile data from lenders, companies, and public court records to build your report. They package this history and resell it to businesses evaluating you. By law, these agencies must provide you with a free copy of your report annually, but they are not required to give you your score.
• Credit Scores: Your actual score is generated by data analytics companies like Fair Isaac Corporation (FICO) or VantageScore. They use proprietary algorithms to analyze your report and assign a consumer credit risk value. This results in a standardized score ranging from 300 to 850 to benchmark your creditworthiness. You can usually purchase these scores directly from FICO or the reporting agencies for about $15.

Standard FICO® Score 8 Ranges:

• Poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very Good: 740 to 799
• Excellent: 800 to 850

Making Your Credit History Into An Asset

If your score currently falls below the “Good” or “Very Good” tiers, there are several practical steps you can take to improve it:

• Pay consistently: Always pay your bills on time. A single payment that is more than 30 days past your due date can significantly damage your score.
• Build from scratch: If you lack a credit history, look into a credit-builder loan rather than taking on standard debt. These loans hold your borrowed funds in a savings account or certificate of deposit, which you claim only after making 12 on-time monthly payments.
• Use secured cards: A secured credit card operates on a similar premise, granting you a credit limit equal to a cash deposit you make with the issuing bank.
• Watch your utilization: Keep your outstanding balances below 30% of your total credit limit on revolving accounts, such as credit cards.

The Bottom Line

The good news is that implementing these strategies can elevate your score relatively quickly; maintaining these habits for a few months to a year can often bump you into the next credit tier. By doing so, your credit score transforms into an asset that saves you money over time through lower interest costs.

What if you have older, negative marks on your history? It’s a common misconception that these disappear in just three years. In reality, late payments, foreclosures, and collection accounts typically remain on your credit report for up to seven years. However, their negative impact on your score diminishes significantly as they age, provided you keep your current accounts in good standing. Pretty soon, you will trade the vicious cycle of paying high interest for the virtuous cycle of saving and investing.