Do you know your credit score?
When you’re in the market to purchase an expensive item, such as a car or home, and you need to borrow the money to finance the purchase, your credit score becomes very important. Your credit score is a measure of your creditworthiness that impacts your risk (how much lenders are willing to take a chance on you) and directly impacts the “cost” of loans. Therefore, it can have a major impact on what your lifestyle could look like. It can affect the type of home you live in, the kind of car you drive, and even your purchasing ability. But importantly, having an understanding about your debt and how to keep it healthy can help you achieve financial independence.
The credit score model was created by the Fair Isaac Corporation which is used by financial institutions and known as the FICO score.
There are two types of debts that make up your credit score: good debt and bad debt.
Good debt is considered an investment. You have something of value to show for the debt, once that debt is resolved. These investments include mortgages, student loans, or car loans.
Bad debt is when you walk away with nothing after the loan is resolved. It can include credit card balances, pawn shop loans, overdue bills, car title loans, and cash advance loans.
Choosing to make use of too many bad debt options will affect the interest you will pay for future purchases. Banks are taking a risk by loaning you money. The faster you pay it off, the better off your credit outlook will be. When you demonstrate that you are financially responsible by having a good credit score, you will be able to secure lower interest rates when you need to borrow money in the future.
Five factors determine your credit score:
- Payment History: 35%
- Outstanding Balance/Available Lines of Credit: 30%
- Length of Credit History: 15% t
- Amount of New Credit: 10%
- Types of Credit: 10%
Easy Ways to Maintain Good Credit
Sticking to a budget, buying items you can afford, and paying off your credit cards each month can all positively impact your credit score in a big way. Also, knowing what your debt is — whether good or bad — and adjusting your spending and payback habits accordingly is one of the steps to building and strengthening your financial success.
If you’d like to learn more about managing your credit, visit the Office of Financial Readiness for more information, tips, and even credit, investment and financial challenges to assist you with your goals of financial independence.