Your credit score is a part of you that will never go away. Whenever you decide to involve yourself with credit for the first time, there’s no going back; you and your credit score are in it for the long haul.
As you navigate life, you might not look at your credit score every day, but there are some major milestones where your credit score will come into play. The older you get, the more you’ll understand why your credit score is important.
From the first time you use credit to the last, your actions can change the trajectory of your life. By taking care of your precious credit history from the start, you’ll do just fine.
What Does Your Credit Score Start At?
You might assume that you’re starting with a clean slate and a credit score of zero, but in reality, there’s no such thing as a “starting credit score.” If you haven’t started using credit yet, your credit score doesn’t exist.
You begin to build your credit score after opening your first credit account - (this could be a credit card or a student loan. At that point, your credit score is determined by the way you use that initial credit account. As lenders report your credit activity to the three major credit bureaus, you’ll begin to build a credit history that will determine your starting credit score.
Your first credit account can come from anywhere, but for many of us, our history starts with a car purchase.
Your Credit Score When Buying a Car
Your first of many big purchases involving credit will probably be your own car. If you’ve got a car on your horizon, the first thing you’ll put on your list of to-dos is to save money. Although having money stashed away is important, so is having an excellent credit score.
Your dream car may cost a lot more than you can save up during your summer gig at the movie theater, in which case, you’ll need a car loan. A car loan gives you the amount of money you need to buy the car you’ve got your eye on. Remember that if you need a loan, you need to first be approved for the loan, in this case, your credit score is important.
The reason your credit score matters when applying for a car loan (whether you want a new or used car) is because it impacts your loan terms. Loan terms will include how long you have to pay it back, your monthly payment amount, if you have to get a co-signer and your interest rate.
Let’s look at how two different interest rates can change the ultimate price you might pay for the same car.
Scenario one: You’ve been working on your credit score for a while now, and it’s in the good to excellent credit score range. You want a used car that calls for a $10,000 loan and a 60-month loan term. Your excellent credit score earns you a 6.05% interest rate offer. Over the loan period, you end up paying a total of $11,614 for the car.
Scenario two: You’ve been focusing on earning your driver’s license rather than building your credit score, and it’s practically nonexistent. You still want the same $10,000 used car and a 60-month loan term. Although, this time, your credit score isn’t looking too hot, and the auto lender offers you a 17.78% interest rate. In this case, your payments will total to $15,164.
With the only change between the two scenarios being your credit score, there’s a $3,550 difference in interest paid. $3,500 might be what you spent the whole summer trying to save!
Extra Tip: To learn more about what credit score is needed to lease a car or what a good credit score is to buy a car, check out our piece on credit scores and auto loans.
Your Credit Score Throughout College
The following loan you’ll probably run into in life is a student loan. The same idea applies here; your credit score can heavily influence your loan terms.
Loan terms include how long you have to pay back your loan, the monthly payment amount if you have to get a co-signer, and what your interest rate is. With your auto-buying experience, you’ve already learned how a bad credit score can lead to a higher interest rate and an ultimate greater cost to you. Hopefully, you’ve been paying just as much attention to your credit score as you have your grades.
Extra Tip: To learn more about student loans and credit scores give How Student Loans Affect Your Credit Score a read.
Your Credit Score When You Move Out
Once you graduate from high school and head off to college, you’ll probably want to set up some living arrangements outside of your parents' home. Your credit score is needed to rent an apartment.
When looking for an apartment (with roommates or not), landlords love to see an excellent credit score; it gives the impression that you’ll make your rent payments on time. If there’s a battle between you and another group of students for a place, your credit score can help you beat them out and secure the apartment.
Once you’ve got your living arrangements on lock, try to decorate and navigate your expenses on a budget, we don’t want you to fall into the dangers of swiping a credit card. Financial planning in your 20s can be difficult, but you'll be off to a great start with the right tools and a sturdy understanding of credit score requirements.
Your Credit Score When Buying a Home
Are you thinking about abandoning the life of roomies and rentals to become a homeowner? You may start to consider what a good credit score for buying a house is.
If buying a house has always been your goal, then we hope auto loans, student loans, and personal loans have taught you the importance of a good credit score by now.
A home may be the largest purchase you’ve made thus far, which means there’s great potential for your mortgage loan to have the largest monthly payments and the most extended loan term you’ve faced up until this point.
If you’ve been working all this time to improve your credit score, you’ll never fully grasp how much your hard work will pay off when it comes time to purchase your home. If you’re moving in with a partner, maybe their credit history will give you an idea of the other side of things.
Extra Tip: All you need to know about buying a house, including what credit score is needed for a home loan, is one click away and can be found here.
Your Credit Score When You Retire
Even when you’ve purchased a home, left the 9 to 5, and are now living out your life in retirement, your credit score still has value. Your credit score might even be in its best shape ever as your length of credit increases and more and more bad marks expire.
Just because you’re retired doesn’t mean you won’t be making some big purchases. Perhaps you and a couple of old pals wish to split the cost of a vacation home in Hawaii. Or, you have grandchildren going off to college and you don’t want them to have the same debt that you did. You might also start to prioritize exploring the world and putting more money towards traveling.
Having a good credit score gives you more access to credit that you can use in various ways. Not only does having a good credit score help you, but it can also give the people around you a leg up. Your credit score might help out a loved one if you’re open to being a co-signer or guarantor on whatever accounts they’re opening. You have the power to help someone else out on their credit-building journey.
Your Credit Score Throughout Life
From your first car, to college living, to purchasing a home, and ultimately retirement, your credit score will always be important.
Finding smart and safe ways to build your credit history from the start has more significance than you may realize. Once you have a sturdy foundation, continue to maintain or improve your credit score by understanding what goes into calculating your credit and what the best ways to build credit are.
There are thousands of people, educators, and tools to help you throughout your journey, so take advantage of the ones that work for you. Enjoy learning and discovering more about credit and how you can craft an excellent credit history from the Credit Wizard on the Extra blog.