A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. The score will help banks, car dealerships, credit companies, or a lender; determine if a person can pay back a loan. It’s a number that helps with risk assessment. A higher credit score shows that you’re responsible and trustworthy.
What makes up your credit score?
There are many different scoring models and factors that determine your credit score. Here is a general breakdown.
When a lender looks at your credit report, one of the first things they look at is your payment history. If you’ve missed payments in the past, filed for bankruptcies, or have an account in collections, your credit score will be heavily affected. A lender can choose to refuse credit based on this information.
It’s important to pay your bills on time. Contact your lender for any setbacks if you can’t make the payment. We all slip up once in a while, however, transparency and communication will create trust, respect, and a good financial relationship.
Utilization ratio (Used credit vs Available Credit)
The utilization ratio is the amount of revolving credit you’re currently using divided by the total amount of revolving credit you have available. (What you owe divided by your credit limit) For example, a $200 balance on a $1000 limit gives you a utilization rate of 20%. ($200/$1000 = 0.2*100 = 20%)
To maintain a healthy credit score, it’s important to keep your utilization ratio low. The general target ratio that you should aim for is 30%. Having a low utilization ratio will boost your credit score, and in return, you may qualify for the best credit cards.
When you apply for credit, a hard inquiry occurs when lenders and creditors check your credit. The reason why this affects your credit score is; the more inquiries you have, the riskier you are. It may seem that you’re desperate for money and you’re looking to take on additional debt. However, if you’re shopping for a mortgage, auto loan, or a new utility provider, multiple inquiries are generally counted as one inquiry for a given period of time. On the other hand, a soft credit check will not affect your credit score. This is because a soft check is not an inquiry to take out a line of credit.
Type of credit used & length of credit history
Credit score calculations may consider how long your oldest and most recent accounts have been open. If your accounts are in good standing and paid off, your credit score will be positively affected. Additionally, the type of credit used and revolving debt may impact your credit score. Creditors like to see that you’re able to manage multiple different accounts responsibly.
Don't ignore your credit score
To a great extend, having a good credit score shows financial stability. This can translate to other areas of life that will be affected if you have poor credit. For example. Getting a mortgage with a good interest rate will be close to impossible with a poor credit score. Imagine getting married and trying to start a life, but all the banks turn you down because they think you’re too risky. This can take a toll on family and relationships. Please take your credit score seriously.
Other than being denied a mortgage, having a bad credit score can make it hard to buy a car. If you plan to finance a car, dealerships might refuse to give you reasonable interest rates. Also, some landlords check credit scores to make sure they rent to someone responsible. This means you can lose out on that apartment you’ve been eyeing on. Just imagine being asked to pay in full for services that other people pay in monthly installments.
The final nail in the coffin would be losing a job offer because you have bad credit. It’s unfortunate, but depending on the industry, some companies will deny you a job if you have bad credit. DO NOT IGNORE YOUR CREDIT SCORE!!
Here is a general look at credit score ranges:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
If you have bad credit, don’t give up. You can turn the tables around if you chose to.