Is My Credit Score Relevant Right Now?

Intro

The economic ripple effect of Covid-19 continues to spread and cause trouble for more and more Americans.

This final week of May offers a glimmer of hope as some states allow non-essential businesses to experiment with reopening under strict distancing guidelines.

Your favorite restaurant or retailer may be open now, YES! However, before you sprint over to get that lobster roll, you’ve missed so much I want you to check your credit score.

Why?

Things are different now. Unfortunately, the world didn’t merely hit ‘pause,’ wait for the pandemic to leave then hit ‘play.’

The reality is that over 20 million Americans are now without a job, and many businesses have closed their doors permanently.

If you can take a step back and check your credit score, then you may have an opportunity to put yourself in a better financial situation. 

The Score

 The FICO score is the most widely used metric for gauging a consumer’s creditworthiness. Not only does it dictate IF you qualify for a line of credit, but it also determines the interest rate you pay. Look at the two examples below:

they are both for the same loan amount and period. The critical difference is the interest rate. If you look closely, you can see that even though the interest rate is double, the total interest paid is more than double due to the power of compounding.

The same way compounding works for your benefit with investments; it works against you as a borrower. 

 This is where your credit score comes in. The five factors that create your FICO score are:

Payment History – your percentage of on-time payments vs. late

Amounts Owed – How much money do you owe in total. This one is a little tricky because having a loan can help your credit score as long as your debt/income ratio is acceptable. 

Length of Credit History – What is your oldest account? That is where credit bureaus base this factor on. This is why it is vital to look at the age of your accounts before canceling any. 

New credit – How often are you applying for new credit cards/loans? Too many hard pulls on your credit can lower your score. 

Credit Mix – What type of accounts do you have? A blend of mortgage, credit card, student loans, etc. shows lenders that you are responsible for multiple types of credit. 

 

Checking Your Score

If you don’t know where to check your credit score sites such as Experian, Free Credit Report, and Credit Karma all offer free reports and scores. 

It’s hard to make progress if you don’t know where you are. Checking your credit score is a great way to find your financial footing. Is it Poor, Fair, Excellent, or somewhere in between?

Most reports breakdown each factor and how it influences your score. FICO scores range from 300-850, with 850 being perfect. 670 and up is considered “Good,” and 740 and up is “very good.”

If your score is good or higher, focus on keeping the course and letting it grow since it is probably a length of accounts or utilization issue.

If your score is below good, then do not apply for any additional credit. Although you may be approved, you will have a very high-interest rate.

Scores that are below “good” typically have one or two identifiers – missed payments or balances that are too high.

I would recommend calling a credit counselor ASAP because they can offer much more specific advice to your situation, as well as hold you accountable for your improvement plan. 

Bringing it all Together 

Now that we’ve checked our scores and understand what they mean let’s look at the next steps.

If your credit score is in a happy place, then you may consider refinancing some loans or lines of credit to reduce the interest rate and pay less over time.

If your score needs some extra love for a few months, call a counselor and make a plan. Your score is not set in stone, and a few tweaks can put you on the road to an 800 FICO score.