One of the most common goals of new clients at the Financial Gym Advisors is improving their credit score. While that’s a great goal, there’s a lot of mystery around credit and credit related goals.
Often clients have a lot of questions about what a good credit score is and how to get there. What IS a good score, anyway? How is credit calculated? Why doesn’t my TransUnion score match my Experian?! But perhaps the most important mystery around credit is why? Why have a good credit score other than to have bragging rights?
I’m here to tell you that while credit scores do matter in certain situations most of the time, you can and should stop freaking out about your credit score. Here’s why.
First and foremost, working to improve your financial foundations and your relationship with credit is far more important than working specifically to improve your credit score. That said, focusing on these aspects will, in time, result in an increased score. Your credit score is a reflection of multiple factors, such as payment history, credit utilization, and age of credit. Therefore, focusing your energy on fully funding your emergency fund so you can make on-time payments even in turbulent times will not only decrease any financial stress but also positively impact your score! Likewise, paying down credit card debt will improve your credit utilization ratio, effectively improving your score and saving you a bunch of money on interest overtime. Double win! The longer you practice healthy financial habits, the more you’ll see your credit score increase.
Second, credit scores are only important when taking out new lines of credit, like opening a new credit card, taking out an auto loan, or starting a mortgage! And even when taking out a new line of credit, there’s likely less wiggle room than you probably realized. Remember as much as you and your credit score have to “woo” a potential credit lender, they have to “woo” you to win you over as a customer. So sure, your credit score may impact your interest rate, but the lender still has to provide you with a fair and competitive interest rate to prevent you from walking away from the deal. Therefore, if you do have to take out a line of credit, let’s say you are buying a house or financing a car, and your credit score isn’t stellar yet, the best thing you can do is equip yourself with knowledge and options. Do your research ahead of time and know what a competitive rate is for the type of loan you are considering. And don’t be afraid to find another lender if necessary.
Lastly, know that as you improve your credit score though focusing on financial fundamentals, you can always refinance. If you had to take out a loan of any type before your score was rocking, you may have ended up with a higher than average interest rate. This is fixable! It was probably your best bet at the time, so don’t beat yourself up about it. Once your score has improved, you can consider refinancing. You’ll want to consider things like how much you’ll save on interest over the life of your loan, how much origination costs will cost, and go over terms and conditions such as whether or not your new loan has an early repayment penalty.
The takeaway is this: Focus on your financial fundamentals first and your credit score will improve. Until then, stop freaking out about your credit score. Aim to make on time payments each and every month, and as soon as you can, start paying off any credit card debt! If you do have to take out a loan while your credit score isn’t too good, don’t be hard on yourself because there’s less wiggle room in interest rates than you might realize and you can always refinance in the future. With time, these steps will improve your score and hopefully relieve any financial stress too!
