Why Having a Good Credit Score is Important? Find out!

The following is a guest blog post:

Do you know whatโ€™s your current credit score? Do you even have a credit score?

You may be surprised to learn that according to the Consumer Financial Protection Bureau in 26 million people in the USA alone do not have a credit report, and another 19 million do not have recent information or even enough information available to have a credit score.

In fact it is estimated that 4 out of 5 individuals in the 18-19 year old range are affected by this problem, and 1 out of 3 individuals in the 20-24 year old range have this same issue.

 

What is a credit score?

Your credit score is a three digit number and it is a good indicator of whether you will become delinquent on any credit obligations that you owe.

Your score determines your risk as a borrower, and it ranges from 300 up to 850.

The higher your credit score is the less risk you pose as a borrower, and the lower your interest rate can be on any credit that you qualify for.

The most common type of credit score is FICO, and it is calculated by using information provided by the 3 main credit reporting bureaus.

These agencies are Experian, Equifax, and Trans Union.

A poor credit score could cost you in higher interest and even car insurance rates in some areas, or even keep you from getting a job or renting a place to live.

 

How is your credit score calculated?

There are 5 weighted components used to calculate your credit score, and each of these components may have a different impact on your current credit score.

Your Payment History- This factor is 35% of your credit score, and it simply looks at whether you pay your debts in a timely manner.

Your Current Outstanding Debt- This is 30% of your credit score, and it evaluates how much debt you have compared to your available credit. Experts recommend using 10% or less of the available credit that you have in order to get the best credit score possible. If you have $1,000 limit on a credit card you should only charge $100

Your Credit History- This accounts for 15% of your credit score, and it looks at how long you have had a credit history. The ages of the oldest and most recent accounts are factored in, and so is the average age of all the accounts that you have. The length of time since certain accounts have been used is also taken into consideration with this component.

Any New Credit Applications- Every time you apply for new credit this is reflected in your credit reports, and this component makes up 10% of your credit score. The more new credit applications you have the more this can lower your credit score.

Current Types of Credit- This weighted component counts for 10% of your credit score, and it looks at the various types of loans and credit that you have. The greater the mix of credit types that you have the higher your credit score will be. If you have a mortgage, an auto loan, one or more credit cards, and retail accounts you will have a higher credit score than if you only have one or two types of credit. For more credit building tips visit this page.

What about you? Do you know what your credit score is? If you don’t then you should find out!

Learn more about how credit inquiries can impact your credit score.

8 thoughts on “Why Having a Good Credit Score is Important? Find out!

    • Hi DM,

      I know I can be considered a financial blogger which means I should know my credit score but the truth is I don’t. In fact I never looked it up. As Dave Ramsey says of a credit score, “Itโ€™s the I-Love-Debt Score.” To some extent I agree with that sentiment even though I know that credit scores can determine how expensive your debt can be. Thank you for commenting.

    • Hi PID,

      If nothing else, this post just reminds us about the big role credit plays in all our lives and how our habits can affect it. I appreciate your comment.

    • Hi os,

      It’s true. Knowing your credit score is always a good idea if you are planning to borrow. Good credit scores can often save hundreds if not thousands on the life of the loan. Thanks for sharing.

  1. Well said, a lot of people, especially younger people are not fully educated on how important a their credit score is, how it is calculated and how to build good credit. This cause problems sooner or later when good credit is needed for mortgages, loans etc. Everyone should at least know or have an idea of their credit score so that they can work on maintain or improving it.

    • Hi TWD,

      While I never stress over my credit score, it’s still a good idea to know where you stand especially if you are going to borrow for a major purchase. Knowing and having a good credit score can save a lot of money over the life of the loan and while one should not be overly reliant on credit to make purchases it’s still important to qualify for the best rates when you do tap into it. Thank you for stopping by and commenting.

Leave a Comment

CommentLuv badge