What Is A Credit Score And Why Does It Matter?
November 30, 2018
Your credit score is incredibly important. The magical little number can define our financial status in the eyes of many. If you’re wondering, “What is a credit score, anyway?” – don’t worry! We’ve got you covered.
What is a credit score?
A credit score is a three-digit number that banks, credit card companies, and other financial institutions use to evaluate your creditworthiness, or how likely you are to pay back debt. This includes personal loans, lines of credit, and insurance.
Your score is calculated through careful analysis of information in your credit report by the credit bureau, either Equifax or TransUnion. Financial institutions use this information to help make decisions about the services and products they offer you, such as interest rates and insurance premiums.
This information also relates to your debt: how much you have, how long it takes you to pay back, what type you have, and how long you’ve had it.
Credit scores typically range from 300 to 900 depending on the scoring model, and the higher your score is, the easier it may be for you to access these financial products and services. Credit scores, in the eyes of financial institutions, reflect your behaviour when it comes to credit. For example, missed or late payments may lower your score, while being in the habit of paying your bills on time may improve your score. Now that you know the answer to, “What is a credit score?” – let’s move on to why it matters!
Why does my credit score matter?
Your credit score is a measure of trust: the higher your score, the more trust lenders and institutions will have in your ability to pay them back. A good credit score can help you improve your financial well-being and make getting a mortgage, buying a car, or starting a business a lot easier (and cheaper!).
As the popsicle shows, your credit score is affected by payment history, credit utilization (how much credit you use out of what is available to you), your credit history, credit mix (types of credit), and your number of credit inquiries.
What can I do to improve my credit score?
You can improve your credit score in two easy steps.
1. Pay your bills on time. Set up pre-authorized payments on all of your bills, especially the ones that report to the bureau (mortgages, student loans, auto loans, and credit cards). These can also include your utilities, cell phone, insurance, etc. Paying your bills on time accounts for 35% of your credit score.
2. Watch your credit utilization. The amount of credit you have available is more important than you might think. Often times, we run up balances on our cards and are unaware of the damages it can cause. Credit utilization is the ratio of your credit card balance to your credit limit as listed on your credit report. So if you have a combined credit limit of $10,000, keep your total balance under $3,000.
We hope we’ve answered your question, “What is a credit score?” By keeping your credit and financial security consistent (such as making payments on time and regularly), you will be seen as more responsible.