Why A Good Credit Score Can Save You Hundreds of Thousands of Dollars Oover Your Lifetime
Ann Garcia, CFP®
Head of Content & Author
Ann Garcia, CFP®
Head of Content & Author
Ann is a nationally recognized financial advisor and author who provides comprehensive financial planning and investment management advice to families, businesses, and individuals. She obtained her BA from the University of California, Berkeley, is a member of Phi Beta Kappa, and holds the Certified Financial Planner certification. Ann lives in Oregon with her husband and is the proud parent of two recent debt-free college graduates. In her free time, she enjoys running the Wildwood Trail and exploring Portland's vibrant food scene.
Tihomir Yankov, JD
Financial Advisor, Founder & CEO
Tihomir Yankov, JD
Financial Advisor, Founder & CEO
Tihomir is the Founder, CEO, and Registered Investment Advisor Representative of Tobi. Prior to founding Tobi in 2023, he was a consumer financial services attorney in private practice for twelve years. He earned his BA in Economics from the University of Virginia and his JD (cum laude) from American University. He lives on a small farm outside Washington, D.C. with his wife and middle-school son, perfecting the art of keeping their alpaca, llama, horses, and sheep in a semi-perfect state of harmony. Their rescued alpaca became the inspiration for the company's mascot.
How Your Credit Score Matters
Your credit score is more than just a number: It can impact almost every aspect of your financial life and can easily help you save hundreds of thousands of dollars over your lifetime!
- ✔️Whether you can qualify you for any loans – credit cards, mortgages, car loans, and others.
- ✔️Setting the interest rate you pay on debt if you do qualify
- ✔️Setting the premiums you pay on many insurance policies
- ✔️May even impact your job hiring decision
- ✔️May be reviewed by prospective landlords before renting you a home
Essentially, your credit history and your credit score may be used as a proxy to assess how dependable you might be in meeting your future financial obligations to others. In a way, it's a measurement of how much risk you bring into everyday transactions.
But if your credit score isn't where you want it to be, you can take steps to improve it. Note, however, that establishing a new pattern of behavior can take months to reflect in your credit score. That's why being proactive could make all the difference.
Credit Score Basics
Your credit score is calculated based on the health of your past payment behavior—not your income or assets. This means you could be a college student working a summer job and still have excellent credit if your payment history is solid.
So it's not an asset score, nor an income score! It only measures how you handle credit obligations.
However, the credit score is always calculated from information contained in the underlying credit report with each of the three main credit bureaus. So errors in your credit report can drag down your score. That's why you should review your credit file at least once a year. Under U.S. law, you're entitled to a free credit report from each bureau annually. Take advantage of this, dispute inaccuracies, and keep your score accurate.
Why lenders care about credit reports
When you apply for a loan, lenders have one simple question: How likely are you to pay back the full amount due on the day that it is due?
To answer this, lenders rely on your credit history—a detailed record of your past payments to creditors. This information is collected by three main credit bureaus: Experian, TransUnion, and Equifax.
Here's the tricky part:
- Creditors aren't required to report your history to any credit bureau, and reporting comes at a cost for them.
- As a result, your credit file is very likely to differ across the three bureaus, because not all creditors report to all three.
- Pulling your credit history also costs money, which is why a lender may only pull your credit history from just one random bureau to save on costs.
For smaller loans like car financing and credit cards, lenders typically pull from just one bureau. For larger loans, such as mortgages, they pull from all three to ensure accuracy.
Why use a credit score in addition to the full credit report?
Imagine you've been making payments for ten years across several loans. That can be a lot of transactions on your credit reports! And reviewing them line-by-line to make a determination on how often you're paying on time can be tedious and prone to errors for lenders.
So lenders would pay extra to calculate your credit score for the report they're pulling to simplify and distill your creditworthiness in one easy number.
The higher your score, the better!
Factors That Influence Your Credit Score
Your credit score is determined by several factors, but they don't all carry the same weight. Using a FICO model as an example:
- Payment History (35%): Paying your bills on time is the single most important factor.
- Credit Utilization (30%): This is the percentage of your available credit that you're currently using. Lower utilization signals less risk to lenders.
- Length of Credit History (15%): The longer you've had your credit accounts, the better.
- Credit Inquiries (10%): Recent applications for credit can lower your score temporarily.
- Credit Mix (10%): Prior history of managing a variety of credit types (e.g., credit cards, car loans, mortgages) can slightly boost your score.
*** Income or assets are NEVER part of your credit scores! ***
And while each scoring model has some differences, they all include these items and in similar proportions.
Credit Scoring Models: VantageScore vs. FICO
Here's where things get interesting: Not only are there three credit bureaus, but there are also two major brands of credit scoring models: VantageScore and FICO, which compete with each other for lenders' business.
- VantageScore: It's cheaper for the lender to calculate, and typically used for smaller loans like credit cards and car loans.
- FICO: It's a lot more expensive to calculate, and is preferred for larger or higher stakes loans, such as mortgages.
What does this mean for you? Your credit score can vary depending on which bureau's report is pulled and which scoring model is used.
The good news is that even if each model leads to a different score, if one moves up or down, usually the other would move in the same general direction as well.
What credit score should I aim for?
That depends on the scoring model used, but generally you would get the best possible interest rate if your credit score is at least 760.
The average FICO score is 717, and about a quarter of Americans have a FICO credit score over 800, which is considered excellent.
How can having a better credit score help me save on interest?
A FICO credit score of 760 would get you the best interest rate available for virtually all loans, including mortgages.
Having good credit can easily save you hundreds of thousands of dollars over your lifetime. And here's how:
Take a $400,000 30-year mortgage at a 6.5% interest. This would result in total repayments of $910,178. That's more than $500,000 in interest!
But if you manage to shave off ½% in interest and bring it down to 6%, you would be paying a total of $793,671 instead – that's $116,000 in interest savings from just half-a-percentage point!
What if I have different credit scores with each bureau?
That's actually pretty normal! Not all lenders report your credit with all three bureaus, so you will have different information in each bureau's credit file. And a different credit score too! But they should never be too far off from each other.
When applying for a mortgage with different credit scores from each bureau, mortgage lenders would only use your middle FICO score and disregard the other two. And if you're applying with a co-applicant, such as a spouse, then they'll evaluate your joint application using the lower of your two middle FICO scores.
Boosting Your Credit Score Takes Patience
Improving your credit score isn't something you can achieve overnight, because a lot of the weight is based on demonstrating long-term patterns. But there are levers you can pull to make steady progress:
- Pay your bills on time, every time. This is the single most important way you can improve your credit scores.
- Review your credit file from each bureau once a year for errors and dispute inaccuracies.
- Keep your credit utilization low by using less than 30% of your available credit limit.
- If you're rate shopping for the best possible rate by applying to multiple lenders, it may be best to do so within a 14-day window because both FICO and VantageScore models would typically group all those inquiries as a single inquiry.
- Coming Soon: Activate Tobi's Credit Score Smart Card™ to track your progress and explore strategies for improvement.
Common Credit Score Myths and FAQs
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