You keep hearing about this thing called a credit score. Somewhere out there in the ether someone has a number on you. They’re keeping track of you. Rating you, judging you on your financial life.
Sounds kind of creepy, doesn’t it?
Maybe you’ve made a few mistakes in your past, (I certainly have) but you’re still being judged for it.
Let me just say up front that’s not always a bad thing (I’ll explain later).
Still, not knowing what that magical number is, or how to change it, can make you feel helpless and not quite in control of your finances.
Creepy or uncomfortable- or not, it’s a fact of life. Your credit score has a major impact on your financial life. It affects how much you will pay for a new car, or for a house — or whether you are even able to purchase those things.
Did you know your credit score can also affect whether you get that dream job, or rent that awesome downtown apartment?
In my case, my less-than-excellent credit score turned out to be a good thing — because it prevented me from buying my dream house. A house I couldn’t really afford.
A cautionary tale that turned out for the best. But it shows in real dollars what a lower credit score can actually cost you. So you can avoid the same problem.
Here’s what happened:
A Bad Case of House Fever
Real Estate porn is a bad habit of mine. I’ll scan Zillow on the regular, just for fun, to see what’s out there. I love the crib I’m in now, but you never know if there’s something even better out there, right?
And one day it happened. I found her: the house I just HAD to have. I got the Fever.
She was located along the main river that runs through my town, specially designed to take advantage of the spectacular views of the river, and the osprey and heron and beaver that live there.
A little private dock out back, to tie off the fishing boat, or a kayak.
Great location, so close to downtown, and yet sitting on the covered patio out back, it felt like a world away.
She was way out of my league, price-wise, so I tried to forget her. For a while I was successful in putting her out of my mind. But one day my wife and I were out taking a walk and I suggested we just pop over and have a look at this cool house I had found online.
As often happens in these tales of near-catastrophic destiny, the owner of the house was home. He was happy to give us a tour of the property.
My wife was immediately smitten, and my desire stoked to a fever pitch, I told her we should just do it! We’ll make it work somehow! It’s an opportunity that won’t ever come along again!
All my sober practicality out the window in an instant. Sure, said my dear wife, let’s do it.
So I called a mortgage broker I knew, told him my income and debt situation (no debt except current mortgage), and asked him for a back-of-the napkin estimate of what the payments would be, and if I would even qualify for a mortgage that high.
Turns out I did qualify, but only by the skin of my teeth. Assuming I had excellent credit, which I have had for the last 20 years or so.
My broker came back the next morning with a written estimate. If we sold our house and tapped my 401k for a big down payment (I know, I KNOW! I’m telling you, house fever is a real sickness. You should guard against it by staying off Zillow) my monthly payment would be within $3 of the maximum debt-to-income ratio that the mortgage industry would allow.
By the skin of my teeth. Assuming I had excellent credit.
Like I said, I HAD to have that house. My wife, maybe having a little too much faith in my management of the household finances, agreed.
I went into high gear. Sent the broker my financial documents and permission to pull my credit report so he could provide an official good-faith estimate.
Called a realtor and talked her into coming over the next morning to appraise our house for sale. I gotta get this house on the market right away!
The realtor’s estimate was pretty close to what I’d thought, so here we go!
Reality Bites — or, Shocking News from the Mortgage Broker
Turns out my credit score was not so excellent after all.
It had taken a hit because I had missed a credit card payment a few months back.
Missing that single payment (after years of perfect history!) not only cost me a $39 late fee, but it dropped my credit score below the threshold for the best mortgage interest rates.
It increased the interest rate more than a half percent, which translated into an extra $200 on the monthly payment. That’s a lot!
I had a choice: I could either take a much bigger chunk out of my 401K for a larger down payment (aka, retirement suicide), or I could make a ridiculously low offer that I could barely afford, and that they probably wouldn’t take.
So I made them a low-ball offer, and they didn’t take it. Whew!
But that’s just me making Lemonade out of Lemons
Maybe it was divine intervention, me missing that credit card payment a few months back.
Maybe the money gods knew I was due to get The Fever, and that I would need some help to cool it off. Because it would have been a colossally stupid financial move to buy that house.
The point is, your credit score matters.
(and so does paying your bills on time. Every single month.)
Credit Karma to the Rescue!
Most of the time, a low credit score does NOT work out well in your favor. So a credit monitoring service is a great way to keep track of your score and take any steps needed to improve it.
After researching a few different services, I found Credit Karma to be the best free service. It monitors reports from 2 credit bureaus, and gives you solid tips on how to improve your personal score. If you want a more comprehensive service, you may want to check out myFico. It has a monthly fee, but the educational articles and free community forums provide a ton of credit score knowledge, as well as the enthusiastic support of other credit score nerds.
- Regular credit monitoring from Credit Karma
- Following the recommendations
- Setting up automatic payments for my bills
Now, after 3 months of on-time payments my credit score is back within the excellent range.
Luckily, it bounced back fairly quickly from the 717 that was reported to my mortgage broker to 748 today. The minimum score you need to receive the most favorable interest rates is 740 or above. So I’m good.
Your Credit Score Will Thank You
You deserve to be in control of your finances — and in how lenders and others judge your creditworthiness.
The good news is you can take control of your number. It’s never been easier to monitor your credit score, and raise it to the level that says to lenders “Hey! I’m responsible! Give me lots of money! I can totally handle it!”
Next time you are ready to make a major purchase, rent a new apartment, or apply for a job, you will rest easy knowing that your glowing credit score puts you in the driver’s seat.
In the meantime, though, don’t worry if your credit score is not where you’d like it to be. Like it did me, a low score might save you from making a bone-headed leap off a cliff.
So! You know more today after reading this article than you did yesterday.
So get started now by signing up for a credit monitoring service like Credit Karma or myFico today. Don’t forget to set up automatic bill-paying for your monthly bills to make sure that you are never late on a payment again!
p.s. Also, be on guard for related maladies – like sports-car fever, dream wedding fever, luxury vacation fever, etc.
And hang in there, you got this!