Your credit score is more important than you might realize as it can stop you from securing future credit and other important life concerns.
Credit is a new thing to me. Before moving to North America, I lived in places where there was no such thing as credit.
When I arrived, I soon realized hitherto simple things like renting an apartment and a car were almost impossible without credit.
I opened an account, secured a credit card, and set to building the all so important credit score.
Are you concerned about your credit score? If not, you probably should be.
This simple three-digit number reveals a lot about you and can affect more than just your attractiveness to lenders.
What Is a Credit Score?
A credit score is a number, usually between 300 and 850, that represents an individual’s creditworthiness.
This little number affects almost every aspect of your life – the ability to get cards, loans, jobs, mobile phones, and so much more.
The higher your credit score is, the better options you have when it comes to securing favorable financing for things like a car and a house.
Here are 3 of the most important reasons why you should pay close attention to your credit score and work on optimizing it.
This Is Why Your Credit Score is Important
1. Securing a Credit Line
Your credit score can range from 300 to 850.
Anything above 720 is considered to be a good credit score, while a score over 800 is deemed to be excellent.
A poor credit score can result in you being rejected when applying for new credit.
This means your application for a new credit card, loan, or mortgage can be turned down.
Even if your credit applications are accepted, your credit score can be used to determine how high your credit card and loan interest or mortgage repayments should be.
2. Rejection By Prospective Employers
When you apply for jobs, prospective employers can request to see your credit report and credit score.
While you are not obliged to permit this, it can look bad if you refuse as potential employers may deduce that you have something to hide.
If the job is going to involve handling money or making financial transactions, prospective employers will likely want to take a look at your credit score and credit report.
The check is to determine how much of a credit ‘risk’ you are so a below-average or poor credit score can convince prospective employers you aren’t the right candidate for the job.
3. Your Insurance Premiums
Your credit score can be used to set your monthly insurance premiums. Ironically, a poor credit score can result in higher insurance premiums.
If your credit score is particularly bad, you may be refused insurance policies as insurance companies may deem you to be too risky.
Keeping your credit score in tip-top shape is one of the most important financial goals to aim for.
Finding Out Your Credit Score
Finding out your credit score requires some groundwork.
Contrary to popular opinion, you cannot access it by getting a copy of your credit report.
I learned that one the hard way when I tried to pull it for a rental application last year.
These two agencies pull their information from the 3 big reporting agencies mentioned below.
Many people are blissfully unaware of their true credit score and how it may affect their lives long term.
How Is Your Credit Score Calculated?
There are five main things taken into consideration when reporting agencies are calculating your credit score. They include:-
- Payment history – do you make payments owed on time? Do you pay off the entire balance or do you pay the minimum?
- Total amount owed – the amount of money you owe to how many lenders and how much you have available to you
- Length of credit history – how long your credit history is
- Types of credit – credit card, personal loans, car loans, etc.
- Number of inquiries on your credit history
Out of all these factors, payment history carries the most weightage (35%) in calculating your credit score.
Credit Score Ranges
Credit score falls into five ranges:-
- Very poor – 300 to 579
- Fair – 580 to 669
- Good – 670 to 739
- Very good – 740 to 799
- Exceptional – 800 to 850
Generally, the higher your credit score is, the better but anything over 700 is considered a good credit score.
Credit Reporting Agencies
Each of these credit-reporting agencies has slightly different ways of determining your credit score, so you may find that it is slightly different for each.
When I needed to pull my credit report a year after I started building my credit, I went through Borrowell.
Once I checked my credit was 800+ and I’d finalized the apartment, I went back to my life.
I will share tips on how I built my credit score up so fast and high in a little over a year in a future article.
Lenders are looking for specific criteria when deciding which individuals to accept their credit.
Some credit card companies will want individuals with excellent credit scores to reduce the risk of defaulting on payments.
On the other hand, other credit card companies will be more interested in individuals with poorer credit scores. Why?
The fact that these individuals are more likely to default on payments makes it easier for the companies to receive more money from interest and late fees.
I would avoid companies like the latter and focus on building a solid credit history and score instead.
Finally, be sure to pull your credit report and score at least once a year to check for any irregularities and correct any mistakes.
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