Credit scores have a huge financial impact on consumers, even though most people don’t know how they are calculated or which bad habits may be driving theirs down. Your credit score is a number on a scale of 300 to 900 that can affect all of your financial decisions, from shopping for groceries to applying for a mortgage. Read on to find out why a good credit rating is so important.
4 Things to Know About Your Credit Score
Why it’s important.
Throughout your life, you will probably rely on your credit to acquire the items that you want and need but can’t necessarily pay cash for. Each time you buy something on credit, merchants are taking a gamble on you; the bet is that you will pay off the amount of money owed, plus interest, on time. If you have a good credit score, more people will be willing to bet on you. If not, you will find it difficult to make some of the most important purchases for consumers, including getting a car and buying a home.
What it’s comprised of.
Calculating your credit rating may not seem like an exact science, but there are actually specific areas of your credit history that rating agencies use to determine your credit worthiness. Approximately a third of your rating is based on your credit history. A nearly equal part is based on the amount of debt you’re carrying now. Another 15 percent is based on what kind of credit you have, which could include cash advances, credit cards, and home financing, for example. The amount of time that you have been building your credit also plays a major part in your score; 15 percent of it is based on how old you are in financial years. The smallest portion of your credit rating is based on how many times you have applied for credit.
How to get a good score.
Once you understand what the credit rating agencies are looking at when they calculate your credit score, you will have a better chance of getting a higher one. The best piece of advice to follow if you are trying to raise your score is to pay all of your debts on time. This includes everything from your phone bill to your student loans. Handling all of your financial obligations responsibly will send a good signal to credit rating agencies.
You should also avoid incurring any new debt if at all possible. One of the elements that rating agencies look at is how much debt you have compared to how much credit you have. You’ll need at least one credit card or loan to begin building your credit, but handle it with care so that you don’t find yourself in hot water. This means that you should avoid repeatedly spending up to the credit limit. And remember not to apply for too many lines of credit at once; each time you submit an application, your credit report is viewed, and too many views can lead to a lower score.
Which kinds of credit to pursue.
Some debts, such as student loans, mortgages, or even financing for a car that helps you get to work every day, are considered good debts. These kinds of investments will eventually end up increasing your net worth, which is why you should pursue these kinds of credit.
However, there are also debts that don’t help you increase your earning potential, and these kinds of credit don’t work in your favor as far as your credit score is concerned. Credit card debt is primarily seen as bad debt because of the kinds of purchases that people usually make with their cards. Cash advances are also seen as bad debt because they may signal that a consumer has not managed his or her funds well.
Getting a good credit score requires some effort, but maintaining a good score can be even more difficult. However, if you can look at the full financial picture when you’re making purchasing decisions, you’ll present yourself as a model consumer to rating agencies. Find out more information about your rating on price comparison sites like Rate Supermarket – it always helps to be in the know!