One of the most ubiquitous influences on your financial well-being from now on will be your credit rating. Your credit score, which is expressed as a number between 300 (high risk) and 900 (low risk), will follow you for the rest of your life. But these numbers only tell one part of the story. To find out why your credit rating is so important, keep reading.
Why is my credit score important?
A credit rating paints a picture of how likely you are to pay back any credit or loans that you receive in the future. In other words, your credit rating will tell companies what kind of consumer you are, which is why you need it for everything from getting a mortgage or buying a new car to establishing telephone service in your home. A high credit score means that you will likely receive loans with the lowest possible interest that an institution is willing to give. If you have a credit score that characterizes you as a high-risk consumer, however, you’ll likely have higher interest, which could result in hundreds of dollars more in interest on loans.
What makes up my credit score?
About a third of your credit score is determined by your credit history, meaning that it is essential to start practicing good financial habits as early as possible. Another third is based on how much debt you have right now, so you should avoid using your credit simply because you can. About 15 percent of your score comes from the length of your credit history, which means that the longer you maintain your credit lines, the better your score will be (assuming that you don’t make payments late or exceed your credit limit). In addition to this, another 15 percent is determined by the kind of credit you have. Many consumers are shocked to learn that there are good kinds of credit and bad kinds of credit; some financing companies may give you a cash advance, for example, but this is seen as a negative kind of credit. Lastly, a small percentage of your credit rating depends on how many inquires you’ve made into receiving additional credit.
How can I build credit or improve my credit score?
Since your credit score is essentially an indication of how well you pay your bills, the single most important thing you can do to boost it is pay all of your bills on time. Apart from this habit, the key to building good credit is what you don’t do. For example, you should keep your debt to credit ratio low; if you make a habit out of skirting your credit limits, you could send the message that you manage your finances poorly and leave little room for emergency spending. And while it is essential for most people to have at least one credit card to help build their credit, avoid having too many lines of credit. At the very least, they make it more tempting to live beyond your means, but you could seriously damage your score if you apply for too many credit cards or loans because numerous inquiries into your credit history sends the signal that you’re desperate for money.