What exactly is a credit score … and why does your credit score matter?
You are sure to have heard of the term “credit score.” But do you know exactly what it means and do you understand why your credit score matters?
If the answer is no, you need to become better informed.
What is a credit score?
Everyone has a credit score. Your credit score is based on your credit history. That includes things like the number of accounts you have, your repayment history, and your total level of debt, as well as other factors.
Speaking of debt, if you are currently struggling with debts, check out this guide to finding a debt payoff strategy that actually works.
Credit scores range between 300 and 850. The higher your score is, the better financial standing you will have and the more positive you will look to potential lenders when you need to borrow funds.
That is just one reason why your credit score matters. It enables lenders to evaluate whether you can repay loans in a timely manner.
Who reports credit scores?
In the U.SThere are various credit bureaus, but only three have a major significance in terms of collecting, analyzing, and distributing information about people’s credit scores. Those three are Experian, Equifax, and TransUnion.
Your Credit Score is Affected Both Positively and Negatively by Your Actions
Your actions can determine whether your credit score is positively or negatively affected. For example, if you get into lots of debt, it can negatively impact your score.
Also, applying for a credit card affects your credit score. It can especially affect your credit score in a negative way if you apply for multiple credit cards at the same time as it will raise red flags.
However, applying for a credit card can also have a positive impact on your credit score, as it can allow you to build your credit history and earn rewards.
When you make payments on a new credit card on time, your positive payment history can help to improve your credit score over time. Also, when you open a new credit card account, you could lower your credit utilization ratio, which refers to your outstanding balances in comparison to your overall credit limit.
Why does your credit score matter?
Having a good credit score matters for various reasons. Here are just a few examples
Your Credit Score Can Affect Your Mortgage Rate
If you want to get a mortgage, your credit score really matters. It will affect how much you are able to borrow. In turn, that means you could be limited in where you can live and what type of property you can purchase.
Indeed, if your credit score is too low, you might not even qualify for a mortgage. And according to this article, even homebuyers with fair credit scores can end up paying thousands of dollars extra for a mortgage.
Though, if you have a high credit score, you could borrow more. Your credit score will also affect the interest rate of your mortgage.
Your Credit Score Can Affect Your Ability to Get an Auto Loan
Many people take out auto loans to buy cars and other vehicles. But to qualify for an auto loan, you need a good credit score. You also need a decent credit score to qualify for a higher loan amount and a lower interest rate.
Your Credit Score Can Affect Your Ability to Get a Job
You could even need a good credit score to get the job you want. Most employers perform credit checks during the hiring process; though, to be clear, employers check your credit report rather than your credit score.
If your credit report, which influences your credit score, does not demonstrate that you have financial responsibility, your potential employer is more likely to be hesitant in hiring you.