Credit Scores: What They Mean, What They Do, Why You Should Care
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Credit scores are still among the least-understood aspects of personal finance, at least for the everyday American consumer. A lot of people have never seen their credit score before. They might hope that it’s high, but they have no idea, and they wouldn’t really know what that meant even if they did. Credit scores are left in the realm of mystical financial jargon which most people just don’t understand – and they’re OK with that. The problem is, they really shouldn’t be.
As many of you will already know, credit scores are powerful indicators of 1) your financial health, and 2) how your financial life is likely to progress in the future. We’ll cover what credit scores mean, what they do, and why you should care about them. For people who don’t know this stuff, this will be a very fast way to get you up to speed. You’ll even learn how to raise your credit score.
What Credit Scores Mean
Credit scores are a 3-digit number that tells lenders about your “creditworthiness”. Creditworthiness is a goofy, old-fashioned sounding word. It’s how responsible you are with money, how likely you will be to pay back your lender. Lenders don’t like losing money. If you aren’t responsible with money, you might make payments late, or not at all! A low credit score tells your lender this. If you run into trouble while trying to get a loan or a credit card and you can’t figure out why, this is likely the reason.
What Credit Scores Do
Credit scores are sort of like the sign at the amusement part: “Only people this tall can ride”. If your credit score falls below a certain threshold, you may be denied the loan or credit card you are requesting. Worse still, you may be charged a whole lot of money, much more than the amount charged someone with a good credit score. Of course, your lender won’t come out and tell you all this. They’ll just show you a borrower’s agreement, with one static APR (interest and fees you pay every year), for you to take or leave. Every time you take a loan, you’ll be paying more for it than someone with a good credit score.
Why You Should Care
If this happens over and over, your cost of living will be much higher than it has to be. This can keep you from going on vacation, buying the house you want, sending your kids to college, and living a stress-free life. Bad credit scores can strip these away, without you even noticing that you’ve missed out. A bad credit score is like setting life’s difficulty to “hard”.
After all this, you should know it isn’t that hard to make a credit score go up. You could use the company linked above. You should also learn to pay bills on time, not to take on much debt, and generally spend and borrow like someone who’s a grown up. Your credit score will go up and your cost of living will go down.
Photo courtesy of: Republica
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