Credit Score Need-to-Knows and How It Affects Your Future

Life is full of many exciting milestones: renting your first apartment, buying your first car, and landing your first big job. While all of these occasions are likely to unfold at different times in your life, there’s a common thread that can have a major impact on them all: your credit score. It’s an important number that essentially sums up the state of your financial health, and it’s one that can determine whether you actually qualify for the apartment, the car, or the job that you want.

Other things that it can be? Confusing. Intimidating. Anxiety-inducing. Don’t worry… if you’ve ever broken into a cold sweat while waiting in the small, stuffy room of a car dealership, worrying if your credit score is good enough (haven’t we all at one point or another?), we tapped on Mary Hines Droesch, Head of Consumer, Small Business & Wealth Management Banking and Lending Products at Bank of America, for her expert advice on all things credit score-related. We’re breaking down exactly how it’s calculated, how it impacts your life, and a few best practices you can follow to ensure you maintain a healthy credit score.

MEET THE EXPERT

Mary Hines Droesch

Head of Consumer, Small Business & Wealth Management Banking and Lending Products at Bank of America

Mary Hines Droesch is responsible for leading the strategy, design, development, and management of all lending and deposit products across Retail, Preferred, Small Business and Wealth Management businesses. She is also responsible for Consumer Investments and the Bank of America Preferred Rewards programs. She resides in New York City with her husband and two children.

How is your credit score calculated?

While it’s not exactly fun being summed up by a numerical value, your credit score is a three-digit number ranging from 300 to 850 that can help lenders, insurance companies, landlords (and even potential employers) assess how well you’ve managed your financial obligations. According to Droesch, there are several factors that determine what your credit score is:

Payment history: “If you’re able, make sure you’re paying your balances on time and in full each month,” says Droesch, “because this accounts for over 1/3 of your credit score. However, if you’re stretched thin financially, make at least the minimum payment or as much of it as you can, so you don’t incur any penalty charges.”
Amounts owed (credit utilization): “This is the outstanding debt you owe,” Droesch explains. “It can include auto loans, student loans, current credit card debt, and any other loans you have taken out.”
Length of credit: “Surprisingly enough, closing an old credit card account may hurt your score,” says Droesch. This is because your length of credit history is factored into your credit score. Rather than closing an old card, consider using it for small recurring purchases like a streaming subscription and setting a reminder to pay it off each month.
New credit: “Applying for new credit can negatively affect your credit health,” Droesch cautions. While a single inquiry will only temporarily decrease it (and it will typically rebound if you keep up with your bills), you may want to think twice about whether applying for that store credit card is worth it.
Types of credit: This takes into account the different types of credit you have, such as installment and revolving debt. Installment credit includes bigger loans, like car or student loans, that you receive in one lump sum. Revolving credit, such as credit cards, are loans that can be used and paid back at any time.

What exactly does your credit score say about you?

Sure, waiting to get approved for a loan or lease can feel like waiting for the next season of Bridgerton, but there are a few things lenders are considering when looking at your credit score and deciding whether or not to approve you. Droesch explains they are evaluating the “5 Cs of Credit”:

Character: “This factor refers to your credit history,” says Droesch, “which is your track record for repaying debts.” Having a strong record of on-time payments shows you are a responsible borrower.
Capacity: “Capacity measures your ability to repay a loan,” according to Droesch. “It’s determined by assessing your debt-to-income ratio.” This compares how much you earn with how much you owe—a lower DTI betters your chance of qualifying for a loan.
Capital: “For most consumers, capital refers to the down payment or upfront investment,” advises Droesch. “The more money you’re able to put down on a home or a car, the less risk it is to a lender.”
Collateral: “Collateral can help a borrower qualify for a loan by giving the lender the assurance they can get something back if the borrower defaults on the loan,” Droesch explains. “For example, a home is collateral for your mortgage, and a car is collateral for your auto loan.”
Conditions: “In addition to income, lenders look at other conditions related to the loan,” says Droesch, “like the length of time that an applicant has been employed, their industry, and job stability.”

How often should you check your credit score/report?

According to Droesch, many financial institutions like Bank of America offer to share your FICO score for free each month if you have a qualifying account. This makes it easy to stay informed. As for your full credit report, Droesch recommends the minimum you should be checking it is at least once a year. However, since there are three separate credit bureaus (Experian, Equifax, and TransUnion), and they’re all required by law to give you a free yearly credit report, she says you can actually check it every four months.

In terms of what to look for, you’ll want to verify that all of your personal information is accurate. “Make sure you really focus on the credit history section, especially the section called ‘adverse accounts,’” cautions Droesch. “This can show potentially negative items like a past-due credit account or a debt that was sent to collections, which can hurt your credit.” Credit reports aren’t always error-free, so if you do find an error, Droesch says you should reach out to the creditor first and then the credit bureaus to alert them. Other common errors you should keep an eye out for are accounts belonging to someone with a similar name, accounts incorrectly reported as late or delinquent, the same debt listed more than once, and any incorrect account balances or credit limits.

What best practices can you follow to maintain a healthy credit score?

Having a healthy credit score really boils down to developing healthy credit routines—and sticking to them. According to Droesch, there are a handful of tried-and-true best practices that can help you maintain a good credit score:

Review your credit report: “It’s important to understand what your credit report means because open lines of credit, missed payments, and credit utilization rate all affect your credit health and score,” says Droesch. “When reviewing your report, ensure that these items are error-free.”
Pay on time and in full: A common mistake people make is only paying the minimum amount of their credit card bill. “Since your payment history makes up the largest part of your credit score,” Droesch explains, “if you’re able to, it’s important to pay your bills on time and in full every month.”
Use credit responsibly: “As costs continue to go up,” cautions Droesch, “it’s important to avoid the temptation to cover increased expenses with a credit card.” Try not to charge anything that you are not able to pay off in full every month.
Keep your card balance low: Utilization rate, AKA your balance owed compared to your remaining credit limit, plays a large role in calculating your credit score. “One of the easiest ways to boost your score is by using a lower percentage of your credit limit,” says Droesch. It’s best if you keep your utilization rate below 30 percent. For example, if you have a $2,000 credit limit, try to stay below $650 each month.

How does your credit score impact your financial future?

In a nutshell, having a higher credit score makes you more appealing to lenders. The lower your score, the riskier you appear as a borrower. When you’re shopping for a new car or ready to buy your dream home, your chances of qualifying for an auto or mortgage loan will be better if your credit score is in the higher range (ideally above 740). “Additionally, a higher credit score also increases the likelihood of qualifying for a lower interest rate,” says Droesch, “which will save you money in the long run, allowing you to put that money toward other financial goals and priorities.”

Even if you’re not quite ready to buy your dream home, Droesch says you’ll have an easier time renting an apartment when you have a better credit score. Outside of larger loans or leases, your credit score can also impact your ability to qualify for smaller-scale items, such as utilities, Wi-Fi, and the newest iPhone to hit the market. And if you’re applying for a job that involves handling money, your credit score could even affect your chances of getting hired. Since your credit score impacts so many areas of your life, it’s crucial to build good credit habits. By paying your bills on time, paying your balance off in full each month, and staying well below your credit limits, you’ll be widening your opportunities to meet your financial goals—now and in the future.

money and wallet — *Source: Elevae Visuals*

Additional Resources

Erica® From Bank of America
A virtual financial assistant that can quickly answer questions and help you stay on top of your finances? Say less.
Bank of America Better Money Habits®
A resource page chocked full of pearls of wisdom, from saving and budgeting tips to educational tools and even tips on credit and homeownership.