Learning how to protect and raise your credit score is one of those important life lessons that a lot of us were never actually taught. Too often, young people learn the hard way that running up a credit card and making late payments are decisions with expensive consequences. Having a low credit score limits your lending options and costs you more in interest. Keeping your credit score high makes you an attractive candidate if you ever need a loan and gives you access to the best interest rates. Employers in certain sectors also require candidates to have good credit, so a new job opportunity could make your credit score very important.
Maintaining a perfect credit score of 850 isn’t realistic for most of us. That said, excellent credit is achievable through careful financial planning and a good understanding of how your actions can affect your credit score over your lifetime. Your financial planning advisors are the best source of specific guidance about how your circumstances affect your credit score, but we’ve put together a list of some of the life events that are most likely to raise or lower your score.
LIFE EVENTS THAT IMPACT YOUR CREDIT SCORE
GOING BACK TO SCHOOL. Any student loans you take out in your name will affect your credit score—whether you’re going back to school yourself, or have taken on a parent PLUS loan to pay for a child’s undergraduate tuition. The act of taking out student loans generally shouldn’t have any effect on your credit score, unless you apply for a loan that requires a “hard inquiry.” When a lender runs this kind of check, your score may drop by a few points, but most federal student loans don’t require a hard inquiry. Once the loan is due, consistently making loan payments on time will have a positive effect on your credit score.
GETTING MARRIED. Marriage doesn’t directly affect your credit score, and might have no impact for some people. Let’s say you and your spouse maintain completely separate finances and own no shared assets. If they have bad credit and a low credit score, your score will only be affected if you eventually decide to apply for a home loan together or otherwise tie yourselves together financially.
Most couples do combine finances in some way, though. One person’s credit score could absolutely be affected by their spouse’s spending habits and other financial decisions, assuming they have joint accounts and/or jointly own property. For example, what if you and your spouse apply together for your spouse’s car loan, and for some reason they stop making payments without telling you? Both of your credit scores will be dinged.
GETTING DIVORCED OR BECOMING WIDOWED. Until your name is removed from any joint account or jointly-owned property, your credit score is still tied to your ex’s. Make sure your ex stays current with any payments on those shared assets.
In a more general way, divorce can also impact your credit score because it tends to create new financial pressures. Be cognizant of credit card usage and make sure you’re clear about what payments you owe every month so you don’t miss any by accident. (If you’re new to managing your money, your financial advisors can help you review all of your financial obligations and set up scheduled payments so nothing gets missed.)
The death of a spouse is generally less likely to affect your credit score—unless you had significant shared debt when they died, and were counting on their future income to pay off that debt. You’ll either have to resolve it on your own or deal with the consequences of defaulting.
STARTING A BUSINESS. Thinking about taking a leap and going out on your own? Starting your own business could give you financial freedom someday, but your credit score might suffer first. It’s rare for a new business owner to be able to fund their venture using investor money or their own savings. Most likely you’ll have to take out loans and put some startup costs on your own credit cards until the business starts paying for itself. With a good business idea, a really good business plan and some luck, you’ll be successful enough that you’ll be able to pay your bills on time and eventually repair any damage done to your score when you were starting up.
But there’s also a risk. What if the business fails? What if you’re not able to pay off your loan or credit card balances? Your score might never fully recover, and that will make it more difficult to get financing for other ventures down the line. The impact on credit score is just one of a hundred things that potential business owners need to consider during the early stages of planning a new business.
GETTING A HOME LOAN. Owning a home or investment real estate can have a positive or negative impact on your credit score. When you apply for a loan, lenders will run a hard inquiry that will typically cause your score to drop by at least a few points. (You can apply to multiple lenders within a 45-day period without getting dinged for multiple hard inquiries.) Once you buy a home, paying your mortgage consistently should help your credit score creep up over time. Payment history is the most important factor affecting your credit score, so creating a habit of always paying your mortgage and other bills on time is a huge part of staying in the excellent range.
LOSING YOUR JOB, INCURRING BIG MEDICAL BILLS OR HAVING OTHER FINANCIAL PROBLEMS. Any life event that causes you to drain your savings could have a big and lasting impact on your credit score. Losing your job or incurring medical debt shouldn’t affect your score directly, even if your medical debt goes into collection. However, if your only option is to live off credit cards, racking up that debt will absolutely be reflected in a lower score. Filing for bankruptcy will cause your credit score to plummet by more than 100 points and will remain on your credit report for up to 10 years.
RETIRING. You’re never too old to need a good credit score! Retiring shouldn’t have a direct impact on yours, but retirees may run into trouble with credit in a few common ways. One potential pitfall is relying too heavily on credit cards to compensate for living on a fixed income that may be lower than you’re used to. On the other hand, some retirees can live comfortably on their retirement savings and stop using their credit cards as much as they did when they were working. As payment activity slows down, credit scores may drop. Using credit responsibility and paying off credit card balances on time is just as important for retirees as it is for anyone else.
NEED HELP WITH YOUR CREDIT SCORE?
Sachetta’s financial planning advisors are here to help you make the smartest financial decisions for every stage of life. Whether you’re a young professional, a new business owner, retired or anywhere in between, we want to help you look down the road and put the financial plans in place that will take you where you want to go.
Protecting your credit score is an important part of your financial future. If you’re trying to fix past credit mistakes or have any questions about using financial planning to improve your credit score, contact us today!
Matthew J. Stead, MSFP, joined our team in 2014. He obtained a bachelor’s degree in finance at Bentley University and his master’s degree in financial planning (MSFP) at The University of Georgia. Matt wears a variety of hats in the office but primarily serves as our Chief Operating Officer, as well as building and maintaining our IT infrastructure.