Most of us don’t even realize that such a thing as a credit score exists until we’re trying to get a much-needed loan. By then, it’s too late and the number is all but carved in stone.
What is this credit score we speak of? It’s a single three-digit number that acts as a major tell into how you handle your finances. The lower it is, the less likely you are to get a loan (and likelier to get one that doesn’t fit your terms). Here’s why our credit score makes for one of the big numbers in our lives.
How banks and similar institutions view your credit score
Your credit score is formed based on virtually every formal payment you ever did. The data collected for it can go back decades, making it a fearsome number even for those of us who now take good care of our finances.
In general, credit scores are most often looked at by institutions that loan money – you’ll need to present your credit score for any loan you might be after, from quick cash to mortgage. These institutions won’t really care that your actions in the past aren’t indicative of your current understanding of finance: the words “I’m more responsible now” will hardly have any effect.
It’s not just about whether you can get a loan or not. As unfair as it might seem – especially if you’ve made great strides in how you handle your finances – those with higher credit scores enjoy lower interest rates and generally better borrowing terms. The lower your score is, the more you’ll be paying on a monthly basis, making your payments more difficult to complete on time and therefore threatening to lower your credit score further. It ain’t pretty, but financial dealings rarely are.
What you can do about your credit score
Unfortunately, there isn’t a whole lot you can do to improve your credit score. The number doesn’t favor recent dealings over older ones – paying everything on time during the next five years could be canceled out by five years of neglecting payments when you were a teenager. The age-old saying that it takes many good deeds to build a reputation but a single bad one to ruin it is very much applicable when it comes to credit scores.
That being said, there’s no need to make your score any lower, and positive practices will certainly help improve it (as miniscule as the improvement might seem) – you might have an urgent need for a loan in the future, and taking care of your finances now will greatly improve the borrowing terms later on. Make an effort to never miss any payments – bills, mortgages, loans and anything else that isn’t delivered ‘under the table’. Also, keep an eye out for credit card debt – never max out a credit card, as it won’t do any good for your credit score.
Conversely, a credit card is one of the few tools that can actually help improve your credit score. Having a credit card with good credit that’s managed responsibly will raise your score – if you don’t own one and need a higher credit score, obtaining and using it should give the number a noticeable boost (provided you don’t get too shop-happy, that is).