How Are Credit Scores Used?

You probably wouldn’t lend money to just anyone. First, you’d want to verify their willingness and ability to pay you back. Credit scores are a standardized way for lenders to do just that.

It might seem like your credit score is just a number, but it’s much more than that. Having good credit can open doors for you now and in the future. Here’s a closer look at how credit scores are used and why it’s important to work toward having a good one.

What are credit scores?

Your credit score is a number that shows potential lenders how likely you are to pay money back. Credit bureaus calculate this number by tracking how much debt you have, as well as your track record of repaying your debts.

Five factors affect your credit score, and each one is weighted differently:

1. Payment History: 35%
2. Credit Utilization: 30%
3. Length of Credit History: 15%
4. Credit Mix: 10%
5. New Credit: 10%

It’s easier to damage your credit score than you might think. Just one missed payment (usually 30 days late or more) can cause your credit score to drop significantly. This can impact your score for up to seven years.

How are credit scores used?

Most people know that their credit score matters, but they might not understand exactly why. How do lenders use your credit score? Here’s a closer look at why lenders, employers, and other organizations want to know this number.

Deciding whether to extend credit

Credit scores allow lenders to quickly determine whether they want to issue you new credit or not. 

Most people apply for some type of credit at least once in their lives. These are some common examples:

• Credit cards
• Personal loans
• Car loans
• Mortgages

Each lender uses different rules to decide whether to issue credit, but the higher your credit score, the more likely you are to be approved.

Determining interest rates

When lenders issue people credit, they don’t offer everyone the same interest rate. If a lender sees you as a risk, they are likely to offset that risk by setting a higher interest rate for your loan. 

Here’s an example. Imagine that you’ve been working on building your credit, and you now have a respectable credit score of 700. Your friend has several recent late payments, and their credit score is 550. 

You both apply for a loan with the same lender. Your interest rate ends up being quite a bit lower than your friend’s because the lender is more confident in your ability to make payments. 

Reviewing housing applications

Credit scores aren’t only used to determine whether a lender will extend new credit to you. In many areas, landlords may review your credit score to determine how likely you are to pay rent on time.

Screening job applications

Some potential employers may look at your credit report to inform hiring decisions. This is more common in industries that deal with financial matters or sensitive information.

Connecting utilities

Having a good credit score can streamline the process of connecting utilities to your home. 

Before connecting utilities to your house or apartment, the utility company might run your credit. If your credit score is low enough that the company is worried about you paying your utility bills on time, it might require a deposit. However, if you have good credit, you might not have to pay this deposit.

Deciding insurance premiums

When you purchase car insurance, homeowner’s insurance, or life insurance, having a good credit score might save you money. In many states, insurance companies can use your credit score to help determine your monthly premiums.

How to build credit

Do you want to boost your credit score? These strategies can help get you started.

Pay your bills on time

Payment history is incredibly important. Establishing a track record of paying all of your bills will improve your credit score over time.

Keep credit card balances low

Ideally, you should use 30% or less of your revolving credit lines. Using 10% or less is even better. If you have outstanding credit card debt that’s compromising your score, every little bit you pay toward it counts.

Get a student or secured credit card

What if you don’t have a credit card at all? Choosing the right starter credit card can help you start building a strong credit history. 

Student credit cards are made for people with little to no credit history. Secured credit cards require a cash deposit to establish your credit line. Alternatively, you might consider a credit builder app like Kikoff. 

Limit new credit applications

In some cases, opening a new credit line may improve your score. But don’t apply for multiple credit lines at once! Each application involves a hard inquiry into your credit history. One hard inquiry may temporarily lower your score by a few points, but multiple inquiries in a short span of time could cause major credit damage.

Boost your credit with Kikoff

Is your credit score not quite where you want it to be? Don’t be discouraged. When you understand how credit scores are used and how to improve yours, you’ll be well-equipped to start moving toward your financial goals.

If you want to boost your credit score quickly, Kikoff can help. We’re a credit-building app that connects you to a virtual credit line. Each time you make a payment, it gets reported to all three credit bureaus.

Repairing your credit or building it for the first time takes effort, but it’s well worth it. As your credit score increases, you’ll unlock opportunities to help you get where you want to be.