All young professionals know that their credit score is important. Having a high credit score may not be the greatest pick up line at a bar, but it does help you out in other areas of your life (the non-drinking areas).
Now let’s get back to the basics. Don’t be ashamed if you don’t know what a credit score is. Who cares. You’re going to find out right now and then you can get back to enjoying life.
What is a credit score?
A credit score is a number between 300 and 850 (the higher the better) that determines how much a lender will trust your or charge you. A lower credit score means that you’re far more riskier and also less likely to pay the money back. A higher credit score means the opposite. The lender can charge you a lower interest rate because you’re more likely to pay the money back.
Think about it. Two buddies come up to you to ask for money (assuming that you’ve got lots of money saved up!), one bud always pays off his credit cards on time and therefore has a high credit score. The other bud rarely pays his credit card on time and has a low credit score. Who are you going to charge less interest to? Who are you more likely to loan the money to?
What’s a good credit score?
Don’t start panicking about what is considered a good credit score. If 300 is the lowest, you definitely don’t want to be anywhere close to this number. I don’t want to give a cop out answer but there are many credit scoring systems and scales. It depends on what type of loan you’re applying for and what system is used. But that’s too much of a cop out answer. Generally speaking, you should strive to hit anything over 700.
What’s the basis of a credit score?
35% payment history
30% amounts owed
15% length of history
10% new credit
10% types of credit
Over one-third of your credit score is based on your payment history (pretty much whether you make your payments on time). If you’ve ever missed a payment or figured it didn’t really matter, think again. You can be a credit card user for over a decade, but if you don’t make your payments on time you’ll still have a lower credit score. The credit card company will love you because of all of the late fees but potential lenders would be too impressed.
Another third of your credit score depends on the amount of money you owe. This shouldn’t be a shocker but if you owe money, it’s going to be difficult for you to loan money. Now I do realize that many of you young investors reading this blog are going to want to invest in real estate once your savings get jacked. Just remember, your student and auto loans will impact your credit score. You might want to try to kill off your debt before you attempt to go for a mortgage.
The rest of your credit score is based on: length of history, new credit, and types of credit.
Now I know talking about a credit score is about as fun as nursing a hangover, but did today’s article help you understand the topic a bit better?