Most Americans will need credit at some point, whether it is a credit card, a mortgage or a student loan. But to get these, especially at a low interest rate, you need to have a good credit score.
A credit score is a number reflecting how a person handles credit -- and a major consideration for prospective lenders.
"A credit score is a measure of your financial risk," said Kelli Anthon, financial coach at the Belvoir Federal Credit Union. "That's important because prospective lenders will look at the information on your credit report to determine whether or not they want to loan money to you."
"The higher the credit score, the lower the interest rate, and therefore a better savings on the loan."
A credit report lists how consumers handle their credit, such as whether they are paying off their loans on time and how much credit they've used on credit cards. Three U.S. credit bureaus -- TransUnion, Equifax and Experian -- keep track of these credit scores and allow consumers one free credit report, each year.
Knowing your credit score is important because it affects all aspects of your financial life, Anthon said.
"Anytime you are requesting funds, your credit will be checked, whether it be for a mortgage, for a credit card, or for an auto loan. Some employers also check credit," she said.
The score ranges from around 300 to 850. "A 720 and above is considered 'A' credit," Anthon added.
There are five components of a credit score: payment history, amount owed, new credit inquiries, length of credit history and types of credit used.
"The payment history and the amounts owed on accounts is 65 percent of the credit score, so that tells you how important it is to make your payments on time and to keep your balances down on your credit cards," Anthon said. "The goal is to keep your balances at 30 percent or less of what your limits are."
Credit inquiries make up 10 percent of a credit score.
"Anytime you are going to ask for money -- say you're applying for a credit card or you're applying for a mortgage loan or a personal loan -- someone's going to check credit. That takes points off your score. Keep your inquiries to six or less per year," she said.
Length of credit history is 15 percent of the score, so the longer a person has an account open and in good standing, the more weighting it has towards the score, Anthon said.
Finally, the types of credit used make up 10 percent of the score. Anthon recommended a mix of credit cards and loans.
Erica Drame, Army Community Service Financial Readiness Program manager, added that using alternative lenders, such as "payday" lenders, can also harm a credit score.
"This type of credit can bring your score down as well, even if you're paying it on time," she said.
Defaulting on a loan, especially a government-funded loan, is especially harmful to a credit score, she added. Government employees who are struggling to pay government loans could also have their security clearance revoked.
"When you work for the government, you want to make sure the debt you owe to the government is paid on time because that could jeopardize your security clearance," she said. "You have to make sure your student loans are current and not in default, as well as your VA and your FHA loans that you may have on your house."
A credit score doesn't just impact a person's present -- it affects their ability to save for retirement, Anthon added.
"When you have a lower credit score, you're paying higher interest on products and services now that will inhibit your ability to save more for the future," she said.
"It's up to each consumer to monitor their credit and to maintain their credit," she added. "Nobody cares more about your credit than you do."
For more information, call Anthon at (703) 730-1800, ext. 5303, or Drame at (703) 805-1833.
The ACS Financial Readiness Program will also host a Lunch and Learn session on "Liquidating Your Debts" today at ACS during the lunch hour. To register, call (703) 805-4590.
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