Stop Ignoring Your Credit Score
Part of being an adult is taking responsibility for your own financial actions (and sometimes the actions of others). One of the specific responsibilities of every adult consumer is maintaining a credit score. Whether or not you keep track of it, the credit score is constantly being updated to reflect the way you use money.
Credit scores remain mysterious to a vast swathe of the population. What is it exactly? How is it determined? What is it used for? If no one has taught you these things, it may take a little bit of research to understand. We’ll cover all of these answers to explain why it’s vital that you stop ignoring your credit score, at least if you want to improve your personal financial life.
What is a Credit Score?
A credit score is a 3-digit number that tells lenders how responsible you are with money. This will help them determine how much to charge you for credit or a loan. Credit scores are measured by credit reporting agencies. These are independent companies which track the way you use your credit cards when you pay your utility bills, how much debt you have, and other financial data. People with credit scores in the 700’s and above are considered highly “creditworthy.” People with credit scores in the 500’s or lower are categorized as not very creditworthy.
How is My Credit Score Determined?
There are many factors that determine your credit score. Because these factors are constantly in motion, your credit score is constantly changing. Basically, credit reporting agencies are trying to figure out how much borrowed money you can potentially handle, and how likely you are to default on credit or a loan.
They figure this out by looking at many things. For example, canceling a credit card can impact your credit score. On one hand, if you have too many credit cards to the point where you have way too much available credit for your income, canceling a credit card can cause your score to rise because it lowers that too high-level of available credit. On the other hand, if you were to cancel your first-ever credit card, this can cause your score to drop, because taking out that card was an event that initiated your credit history (the longer the better is usually true in personal credit).
There are many other factors which determine your score, but it’s always good to think that using money responsibly will help.
Why Should I Care?
If you have a low credit score, this will set your finances back in a number of ways. For one, you may be denied important loans for a first home or to go to college. You may also find that loans that are granted to you will come with very high-interest rates, that cause you to pay thousands of dollars more than you should during the term of a loan.
In general, a low credit score means a higher price tag on life, with fewer opportunities. Work to improve your credit score and you’ll be glad you did so.