There are always questions surrounding the mysterious credit score. The mystery is created by the very agencies who determine your number. Formulas for figuring out your exact scores are a closely guarded secret. Sure, we might now a little about how it is calculated (read the article here), but no one knows exactly how much an action weighs against your score. Many people want to know what exactly their credit score is, who is behind this stupid thing, what actions impact your score, and how much a single action can change your score. Let's take a deeper look at what a credit score is and how it affects your life.
A credit score is really nothing more than a credit agency (think Experian, Equifax, or TransUnion) attempting to quantify your creditworthiness with a number. Years ago credit scores didn't even exist. If you wanted a loan for something you would go into the bank that you had a relationship with, and if you had good standing in the community, or if the loan officer had a good feeling about you, you would get a loan. Obviously, there is a major flaw in that system. The problem was that anybody, no matter how well respected in the community, can be a bad credit risk for the bank. By calculating the different factors on your ability to repay, the credit agencies came up with a system that seeks to treat everybody fairly without prejudice or bias.
There are several different things taken into account by the credit agencies when figuring out a "credit score". The good news is that most of them are common sense. First and foremost is your payment history. One of the best things you can start doing (or continue doing) is pay all of your bills on time every month. Next, don't owe anyone too much money. Your debt-to-income ratio should ideally be at 25% or less. That means the amount you owe anyone should not exceed 25% of your income.
Is a credit score really that important? Yes, and it's a hard number to fight if it's not very good. The most well-known example of using credit scores are all potential lenders. They will use your credit score to determine whether or not you even get a loan, and if you are approved for the loanyour credit score dictates what credit terms you will receive as well. Most people already know this. However, your credit score is used by a lot more than just lenders. If you apply for a new job, your potential employer may pull your credit report before making their hiring decision. Landlords use credit scores to see who they will rent out their property to. Insurance companies use them as part of their risk assessment before offering you an insurance policy. The short answer is that your credit score is majorly important during your life. The long answer is that it is so important because there isn't a better way of judging credit worthiness in our world presently. Use your credit wisely and learn how to handle your finances properly. Doing so will make sure that the rest just falls into place naturally. |
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