What is a credit score and how is it used?
Credit is essentially a measure of your financial responsibility. Your credit score is a measure of how you handle your finances and manage your credit. Before lenders decide to lend you money, they generally will check your credit score to determine how risky it is to lend you money. You can monitor your credit score as well.
Things that affect your credit score
Your credit score is made up of five key components:
- Payment history (35%),
- Credit utilization ratio (30%),
- Length of credit history (15%),
- Credit inquiries (10%), and
- Credit mix (10%).
Credit scores range from 300-850. Higher credit scores are favorable to lenders.
A higher credit score is great, but if you have a lower score, it's not the end of the world. There are ways you can budget and make adjustments to improve your credit relatively quickly.
Key takeaways on credit
- Bills: Pay those bills on time! Schedule payments online by linking your bank account to your credit card.
- Credit utilization: Keep your credit utilization below 30% of total limits.
- Credit history: Length of credit history counts. Don’t cancel credit cards you no longer use. Let the issuer decide when/if that happens.
Your chapter 1 checklist:
- Watch the Impacts to your credit: Payments, balances and credit history video,
- Download the Credit myths: Discredited worksheet, and
- Get an understanding of what credit is.
Watch the next chapter in the series: Credit truths