Sometimes we wonder about the importance of a high score on credit for our financial decision. Well, a credit score is a numerical figure which shows a consumer’s behavior on his payments and debts he has taken. In the last decade, the importance of a high score has risen and people are now concerned about their credit scores. This is because of various reasons we shall discuss in this article.
Why is a high credit score important?
When we talk about improving our finances, we need to pay attention of everything that revolves around money, including our credit ranking. Let’s discuss the four most important reasons for this.
Makes you financially responsible
Well, to be responsible in your finances you must look at your credit obligations so that you keep control of your money. When you review your score, you will adopt habits that will make you responsible in you finance decisions.
High score leads to more financial opportunities
Among the opportunities are low interest rates on any loans you apply for. A good credit rating makes you a low risk and reliable borrower and lenders would be happy to offer you lower rates. Even employers review your credit report and a bad score can make you lose a dream job. So, importance of a high score should not be ignored.
Avoids identity theft
There are many cases when someone else is using your name to borrow money and not paying back. If you don’t review your credit rating you might not notice it before it’s too late and you end up having a stained credit history. If you suspect that something is wrong when you monitor your credit rating, you can act immediately.
Doesn’t let you fall deeper in financial crises
When you keep an eye on the credit rating, you will always know how much debts have been taken and how much you can afford before they get out of hand. You can stop before the debts cross their limit. It you do not pay attention, you can end up in serious consequences. Therefore, staying in touch with your credit score will tell you what you owe and what amount can you easily afford to borrow without damage to your rating.
Calculating the credit score
If you understand the importance of a high score, you must know how it is computed. Well, you do not have to do the calculations yourself and the real formula is still not known by the public. However, some credit score estimators are available online that will do the working for you. Among them are creditcards.com, freecreditscore.com and the free calculator on MyFico website.
To understand fully, you must understand that there are five categories that affect the calculations of your credit rating.
Your Payment history.
The history of your previous payments forms thirty five percent of the overall score. They show the persons payment behavior. So, if in the past you had been making delayed payments, your credit rating will be greatly affected. Keeping up a high score require you to make timely payments.
Total amount of debt
The more debt you have, the lower your credit score will be. Almost thirty percent of your score depends on the total debt you have taken. So before taking further debt, even through a credit card, you must know where you stand. This way you will maintain financial stability and a high score. If you want to borrow more, you need to pay some existing debts to maintain your rating.
Your Credit history
Your previous credit history affects fifteen percent of your current score. Previous accounts help you to make a high score so you should try and keep your old accounts. However, they have to be operated and not just opened and unused. Moreover, using your accounts also mean that more payments need to be made in time. If you know that importance of a high score, you must make timely payments.
Type of debts you owe
This might seem like a very tiny part as it forms ten percent of your credit rating. But, you should not ignore it. It involves different kinds of debts that a person owes. You should be aware of the fact that three credit card debts will be counted as just one. One should keep installment and revolving debts (credit cards & personal loans, correspondingly)
New credit
If you are applying for a new loan, remember that your lender will ask for a copy of the credit report. This will form at least a ten percent of your overall credit score. It will also be stated on your reported and can lower your score.
All these factors are used to compute the credit score. So if anyone wishes to improve their score, they must work on these five categories. Improving the ones that consume a larger ratio will help you to get a high credit score.