Credit Scores. What Is It & Why Should You Care?

Your credit score has the ability to affect many major financial decisions in your life. Do you know what a credit score is and why it matters? Keep reading to find out more!

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There is nothing I love more than learning along with you, my readers. Recently, I have had many people ask me to teach them about credit scores. While I knew what a credit score was, I couldn’t explain where the number came from. So I jumped at the chance to learn something new and share it. I hope you learn something new, as well!

Your credit score has the ability to affect many major financial decisions in your life. Do you know what a credit score is and why it matters? Keep reading to find out more!

Credit Scores 101

You have probably heard the words ‘credit score’. You probably know that you have one. But do you know what a credit score is and why it should matter to you?

 

What is a credit score?

Your credit score is essentially your financial grade. This grade is a number that indicates how likely you are to repay any debts. Creditors will use this number to decide how risky it will be to provide you with a loan. The higher your score, the more likely you will be able to pay back your debts. The lower the score, the riskier it may be to lend you money. This means that the higher your credit score is you are more likely to receive a lower interest rate. The opposite is also true. If your credit score is on the lower end, if you end up getting approved, you may be stuck with a higher interest rate.

 

 How is it calculated?

Your credit score ranges between 300 and 900 points and is based on information contained in your credit report. Credit reporting agencies in Canada collect financial information on you. This information includes how often you pay your bills, if you pay your bills, when you pay your bills, and how long it takes you to pay your bills.

You have probably heard the words 'credit score'. You probably know that you have a credit score. But do you know what a credit score is and why it should matter to you? Keep reading to find out!

Your credit score is comprised of 5 key categories: payment history, utilization, credit history, credit inquiries, and public records.

Payment History (35%)

Lenders look at your payment history first because your past behaviour is a very good indicator of your future behaviour. Have you missed payments in the past? You’re more likely to miss payments in the future. Always make sure to make all payments and pay them on time.

Related: The #1 Rule for Credit Cards

 

Utilization (30%)

Debt utilization is how much of your credit you are actually using. For example, if you have a $10,000 credit limit on your credit card but on average your balance is around $1,000 then you are only using 10% of your available credit. This shows lenders that you are financially responsible and less likely to overleverage yourself.

 

Length of Credit History (15%)

Your loans, credit cards, rent payments, utility payments, and mortgages are part of your credit history. The longer you have held these types of credit, the more information lenders have on your financial history. A longer credit history allows lenders to see a larger picture of your financial past and helps them to determine what your credit risk is.

 

Credit Inquiries (10%)

Each time you apply for a new form of credit (credit cards, loans, etc.) a credit inquiry is run by the lender. These inquiries can hurt your score if you apply for a lot of new credit in a short amount of time. A high number of inquiries can show that you are spending beyond your means, which is a huge red flag for lenders. If you are spending beyond your means you are less likely to be able to repay your debts.

 

Public Records (10%)

Have you filed for bankrupcy? Or forgot to pay your taxes? Both of these are examples of public records that could appear in your credit report.

 

What’s your number?

No, not THAT number! What’s your credit score?

Don’t know your number? Borrowell will check your credit score for free! They will also send you an email every few months reminding you to check your credit score.

Now that you know your number, what does it mean? As mentioned above, credit scores range from 300 to 900 points. While it varies from lender to lender, a good credit score is anything above 650. Any lower than 650 and you may run into issues obtaining financing.

The typical interpretation of scores is as follows:You have probably heard the words 'credit score'. You probably know that you have a credit score. But do you know what a credit score is and why it should matter to you? Keep reading to find out!

  • 750-900 – Excellent: a safe credit risk
  • 650-749 – Good: Fairly safe credit risk
  • 575-649 – Fair: Above average risk profile
  • 500-574 – Poor: High-risk customer
  • 300-499 – Bad: Extremely high-risk customer

You may not be happy with your credit score as it stands today. Don’t panic! There are ways to improve your credit score (stay tuned for a post detailing how)!

Remember that information does not remain on your credit score indefinitely. Typically, information will only remain on your credit report for 6-7 years. This means, that even if you made financial mistakes in the past, you will have them erased from your report in 6-7 years!

 

Why should you care?

Your credit score can affect your financial plans in the future. If you are applying for a mortgage your bank will run your credit report before approving you. If you are approved, the interest rates may be tied directly to how high or low your credit score is. Applying for a credit card? You’ll want a decent credit score! The better your credit score is, the better you are set up for your financial future.

Be sure to continually monitor your credit score. Personally, I use Borrowell!

 

Interested in a really detailed post all about your credit score? Check out Nick’s post at Mapped Out Money!

 

Your credit score has the ability to affect many major financial decisions in your life. Do you know what a credit score is and why it matters? Keep reading to find out more!

 

8 Comment

  1. I love how you keep it real and said that you learn alongside your readers. Thanks for being real. This post is very informative and needed. I didn’t realize that payment history plays such a huge role with how the scores are calculated. Oh my goodness, I have work to do. I will be sharing this with my family.

    1. Thank you for reading my post! 🙂 I’ll always be the first one to admit when I don’t know something. But there truly is nothing better than learning and sharing it with my readers.

  2. I wish they taught this in high school. I was taught by my parents “Don’t buy nothing you don’t already have the cash for.” and “Work hard and god will provide.” Great! Good! But it didn’t help. I just kept pushing through farm chores hoping to marry a handsome farmer. My small school in a very small town didn’t help either. As an adult with a teenager of my own. My advice is much different than my parents. Thanks for doing this piece.

    1. I am also from a small town and was always told the same thing! Luckily (or unluckily depending on how you look at it) I got a credit card when I was in high school. Even though I was very financially irresponsible with it, it taught me an important lesson that I may have not otherwise learned. Since then I’ve always tried to keep my credit score in a good position just in case.

  3. I am totally bookmarking this! I am 19 and no one ever told me about a credit score. Love it!

    1. I am so glad you enjoyed the post! Credit scores will definitely become a part of your life as you look to purchase a home or even a car. It’s good to know how your credit score might affect you!

  4. Very informative! Easy to take in. Fun and filled with personality. Thanks for sharing.
    Francis @mybreadmoney.com recently posted…How to Prepare to Pay Off Your Debt with Confidence

    1. So glad you enjoyed my post. 🙂 Thanks for reading!

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