I’ll be sharing my personal tips to help anyone understand Credit Score and how it is used!
Your credit score is something extremely important to at least understand for your financial future.
So, what is a credit score? A credit score is simply a representation of how well or badly you handle your money. The higher your score is, the better. Your score is based on many factors like:
- Payment history
- Amount owed
- Length of credit history
- Types of credit used
- New credit
These are things that lenders will look at to determine the risk of lending a person money.
A lender will use credit scores for many situations. Here are a few instances:
Loan Approvals
Credit Card Approvals
Interest Rates – Having a higher credit score can help with keeping interest rates low.
Rental Applications – If you are renting an apartment for example, the landlord will generally run your credit to view your credit history and at that point, they determine how much you will have to pay for your deposit. Someone with good credit will generally pay the minimum amount.
Insurance Premiums – Having a higher credit score can help with keeping premiums low.
Job Applications – In some instances employers will need to check credit as a part of the background check process.
Utility Services – Some companies will review credit scores before proceeding with a service.
Maintaining A Good Credit Score
To maintain a good credit score and be in good standings with lenders, there are a few key things to consider:
- Be sure that you are paying your bills on time.
- Try to keep your running balance as low as possible to keep a good ratio. If you owe too much money, lenders will be more hesitant to approve you for things like loans or opening a new credit card account.
- Check your credit report regularly to identify if there are any errors. You are entitled to a free annual credit report from each of the major bureaus.
- Try to avoid opening too many accounts, as this can negatively affect your credit score.
- Think about having a mix of different types of credit (credit card, loans, mortgage, etc), as this can positively impact your score.
Furthermore, having some debt is okay because it shows that you as a borrower are responsible for handling the money you borrowed from the lender; that debt also helps to build your credit history.
My mother got my brother and I our first credit card when we were teenagers. She did this to teach us how to manage our finances. I remember my limit on that card was only $300, but that was because I had no credit history at that point. The credit card company (or the lender) noticed that I had never borrowed money or paid a bill, so they gave me a small amount to start out with – TO BUILD MY CREDIT. My mother told me, “Once you charge something to the card, make sure you pay it off before the due date and always put MORE to your bill than the minimum.” At that time, I never understood why she told me to pay more than the minimum due until I got older and started handling my own finances.
Remember, the credit card company wants to you pay the least amount so they can charge interest on your balance – that means more money in their pocket. Pay your bills on time, pay more than the minimum due, and pay attention to your credit score. It will do you great in the future!