That mystery is created, in part, by the very agencies who determine the number. Formulas for figuring the scores are kept secret, and the numbers are not readily available; at least not without having to do some work to get them. People often want to know what exactly a credit score is, who is behind it, what things impact your rating and what effect a credit score can have on daily life. Add to that the tough economic times we’re now in, and your credit rating becomes more important than ever. Let’s take a deeper look at what a credit score is and how it affects you.
A credit score is nothing more than an attempt to rank your creditworthiness with an objective number. It used to be that if you wanted a loan you would go into the bank, and if you had a good standing in the community, or if the loan officer had a good feeling about you, you could get a loan. Obviously, there is a flaw in that system; anybody, no matter how well-respected, can be a bad credit risk. So, by calculating the effect of different factors on your ability to repay, the credit agencies came up with a way that seeks to treat everybody fairly.
There are several different things taken into account by the credit agencies when figuring out a score. The good news is that most of them are common sense. The one thing that makes up most of your score is your payment history. Therefore, one of the best things you can start doing (or continue doing) is pay all of your bills on time. Next, don’t owe too much. Your debt-to-income ratio should be at 25% or less. That means the amount you owe should not exceed 25% of your income. Don’t open too many accounts in a short period of time, and don’t close too many either. Only apply for a loan or credit if you really need it. As mentioned, most of these things are common sense and they will always go a long way towards improving your overall financial health.
Is a credit score really that important, after all, it’s only a number, right? Right, but it’s a pervasive number at that. The most well-known example are lenders. They will use your credit score to determine whether or not you get a loan, and if so, what terms you will get. However, your credit score is used by a lot more than just lenders. If you apply for a job, your potential employer may pull your credit report before making their hiring decision. Landlords use credit scores to see who they will rent to. Insurance companies use them as part of their risk assessment before offering you a policy.
There is no doubt that your credit score is important. Now that you have more information on what it’s all about, you can take steps to maintain or improve your score.