The average person most likely knows that an individual’s credit score is important. However, there tends to be a lot of mystery behind credit scores. Questions arise such as, “what is a credit score and why should I care?”, “how is my credit score calculated?”, and “how do I improve my credit score?”. If you want answers to these questions then stick around and keep on reading:)
What is a Credit Score?
A credit score is a specific score given to an individual that defines your credit worthiness, or the likelihood that you will repay your debt. A high credit score shows a lender that based on your prior debt history you are not a risky person to lend money too. A low credit score shows a lender that you have a bad track record when it comes to debt repayment and thus are a risky person to lend money to.
There are different types of credit scores such as FICO, Experian, and VantageScore and they are more or less the same. There are some differences with the grading scale they each use, and not all the scores weigh factors that affect your credit the same. The FICO score is widely used, so for the purpose of simplicity I will focus on that score throughout this post. Your FICO credit score is scored on a scale from 300-850 with 300 being poor credit and 850 being excellent. Your FICO score is based on a number of factors, but we will get more into that later, I’m sure now you are asking yourself “Why should I care about my credit score?”.
*Fun Fact, the acronym FICO stands for Fair Isaac Corporation.
Why Should I Care About My Credit Score?
Your credit score is important if you ever intend on borrowing money. If you plan on applying for a credit card or purchasing a new car or house then you will most likely have to borrow money and your credit score may determine if you get that loan.
If you want to apply for a new credit card that has an awesome rewards program, they will check your credit score and determine if you meet their credit score requirements to qualify. If you have a poor credit score then you may find it difficult to get approved. Even if you do get approved for a credit score the company may only give you a small credit limit on that card. The better your score the higher your credit limit will be approved for.
*Click here to learn more about Credit Card Bonuses
When you go to a dealership to finance an auto loan they will run a credit check on you to see how risky you are. If you have a bad credit score than your probably will not get approved or the terms of the loan may change based on your credit score. The dealer may charge you a higher interest rate or down payment on the loan in order for them to feel more comfortable loaning the money.
The same principles also apply when you are trying to get approved for a home mortgage. Certain types of loans, such as the FHA loan, have a minimum credit score that you must possess in order to qualify for approval. More specifically if you have a FICO score of 580 or greater you qualify for a 3.5% FHA loan, if your FICO score is below 580 you qualify for a 10% FHA loan. Let’s do a quick example to help that set in. If you are buying a $300,000 home a down payment of 3.5% would be $10,500, a 10% down payment would be $30,000. That’s a huge difference that may set you back years until you can afford a house.
Click here to learn more about real estate, house hacking and FHA loans!
Your credit score is important and can have a big impact on your life. It’s important to know your score and improve it as much as you can.
How Do I Obtain My Credit Score?
There are a number of websites that you can pull your credit report from for. Both Credit Karma, and Credit Sesame request your credit score on behalf of you, this is called a soft inquiry and does not affect your credit score.
I personally use Credit Karma and don’t have any complaints. The layout is simple with your score right in the middle. They even provide you with recommendations to help improve your credit score.
How Is My Credit Score Calculated?
As I mentioned earlier the way your credit score is calculated may vary based on the scoring model used. Some factors that are known to affect your credit score are late payments, credit age, amount of debt, and the number of credit accounts that you have opened.
Below are the influential factors that affect your FICO score are, per Experian.com:
- Mostly Influential- Payment history on loans and credit cards.
- Highly Influential- Total debt and amounts owed
- Moderately Influential- Length of credit history
- Less Influential- New credit and credit mix (the type of accounts you have)
Knowing the factors that impact your credit score is very important, this knowledge will force you to self reflect on those bad habits that negatively affect your score. Understanding how you are scored is the first step to improving your credit score.
How Can I Improve My Credit Score?
A good mindset to have is that your credit score can always improve. Just because your score falls in the “good” section (700-749) doesn’t mean that you should stop working to improve. That being said when you are trying to improve your credit score you want to first understand what your score is based off of, then you want to leverage your tools such as credit karma’s personal recommendations.
Some recommendations you may find are open/close a credit card, pay off some of your current debt, and set your current loans up for autopay.
Understand your credit score and always work to improve it, your future self will thank you.
Closing Thoughts
I hope by this point you have developed an understanding for credit scores and their importance. Credit scores can have a big impact on your life and its important to have an understanding. If you enjoyed this post please share if you have any questions or comments hit us up below đŸ™‚
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