Understanding Credit Scores and Their Importance for Your Financial Health

It’s crazy that a 3-digit number can have such a massive power over your finances. Your credit score has massive impacts on what you can or can't do with your money: getting approved for a loan, how much interest you’ll pay, if you qualify for an apartment, or even how much insurance premiums you pay! Despite this, most people don't understand what a credit score is. In fact, many people haven't even heard about it!

So let’s break it down, digit by digit.

What exactly is a credit score, why you should care about it, and what can you do to maintain it?

A credit score is a representation of your credibility in regard to repaying debt. It ranges from 300 to 850. Your credit score is a crucial factor that determines access to loans, credit, and housing.

The most widely used credit scoring model is FICO, which calculates your score based on five key factors:

• Payment History (35%) - If you repay debts on time (Credit cards, loans, and bills)

• Credit Utilization (30%) - How much credit you have used in relation to your total credit limit

• Length of Credit History (15%) - Credit accounts that have been open longer have positive impacts on your credit scores

• Credit Mix (10%) - Having a diverse combination of credit types can positively impact your score

• New Credit Inquiries (10%) - Frequent applications for new credit can temporarily lower your score

Maintaining a high credit score can open the door to lower interest rates, better loan terms, and greater financial flexibility. On the flip side, a low score can lead to higher costs and limited financial options. Whether you’re applying for a mortgage, financing a car, or simply opening a credit card, understanding your credit score is an essential step in managing your financial health.

How do you improve your credit score?

Improving your credit score is entirely possible with the right habits and a bit of consistency. Whether you're building credit from scratch or trying to recover from past mistakes, these steps can help boost your score over time:

• Pay on time, every time - Because your payment history makes up the largest part of your credit sccore, it is crucial that all your payments are made on time. Even one missed payment can hurt, so set reminders or automate your bills.

• Keep credit utilization low - Try to only use up to 30% of your credit limit. For example, if you have a $1,000 credit limit, try to keep your balance under $300.

• Avoid opening too many accounts at once -

• Keep old accounts open - As mention before, the length of your credit history matters. By keeping older credit card accounts open, your average account age increases. Therefore, your credit score also increases.

• Check your credit reports regularly - This allows you to identify any errors or unusual activity which keeps your account safe and accurate.

Your credit score is a very important aspect of your finances that helps provide you with opportunities. It holds a tremendous amount of power, being a key factor in loan approvals, housing applications, and interest rates. By learning about your credit score and practicing smart financial habits, it is entirely possible to take full control over your credit and improve it! By making payments on time, using your credit with caution and thought, and monitoring your accounts, you are setting yourself up for financial success!