Why It's Important To Understand Your Credit Score

A credit score is a number that indicates how likely an individual can repay their loans. The credit score is based on a person's credit report. Credit scores and credit reports can be confusing. However, it's essential that you understand them, what they are, and why they're important, especially if you plan to take out a house or car loan one day.

A Fair Isaac Corporation (FICO) credit score ranges from 380-850. It's a number used to indicate your creditworthiness. Your credit score is what lenders look for to evaluate your ability to repay debts.

A credit report is your credit history's detailed overview. It includes all your payment history, account balances, credit limits, loans, credit cards, and credit accounts.

It's essential to know both what's on your credit report and your credit score. You won't know what factors are influencing your score without your report. Because obtaining credit score information can be fairly expensive, many people don't bother checking their credit unless there's really a need for it. Fortunately, free credit reports are now on offer in some countries. One good example is the free access to Borrowell credit score for Canadians. 

With a credit report, you'll get an overview of which areas your behavior can be changed and what you're currently doing right that you have to continue to increase your score.

Many different factors determine your credit score, including:

As already mentioned, the credit score ranges from 380 to 850. In other countries, such as Canada, the credit score can be up to 900. Your credit score is considered excellent if you have between 780 to 850 (or 900). If your score is just between 700 to 780, lenders still consider that as a strong score. That means you shouldn't have too much problem getting approved for a loan at a great rate. However, your score is getting low when you start hitting 650 and below, and you'll start finding it difficult to qualify for various types of loans.

Many people think that a low credit score or bad credit means you won't be able to borrow. The truth is you still can. Some lenders might still be willing to approve you for a loan, albeit at a higher rate. It's one of the most significant reasons why you have to understand your credit score. Credit score matters because the better it is, the less you pay on loan interest.

Why Is It Important To Understand Your Credit Score?

Understanding your credit score is important because of the following reasons:

Simply review your credit report and credit score if you want to have an idea of how financially healthy you are. By understanding your credit score and credit report, you'll know how often you've applied for a credit card or a loan in the past. You'll also see how you're fairing when it comes to repaying credit card dues and loan equated monthly installments. Checking up on your credit health helps you take appropriate corrective actions and preventive measures to maintain your credit's health.

If you're a new credit consumer, focus on your report and score and understand them so you'll know how to build a healthy history. It takes three to six months of credit activity before credit scores get calculated for new consumers. During this period, carry out small monthly transactions. Applying for a credit card while making sure you're going to pay the full amount every month is also a good move. Be prudent with your repayment to establish yourself as a responsible credit consumer.

You can have a comprehensive view of all the existing loans and credit cards you have through your credit score and report. When you understand your score and report, they can be useful for monitoring your loans' performance. You'll also get a snapshot of the credit cards you own and those you may have given to your children or spouse as add-on cards. In some cases, consumers could find a loan that they've never taken in their report. The problem is that any loan that's reflected under your name, even if you haven't actually taken it, could negatively impact your overall score if it's not getting repaid.

By understanding your credit report and score, which includes your credit history and your track record in taking loans and repaying them, you can ensure that every reflected information is accurate or without any discrepancies. Approach the credit bureau to get any errors you'll find in the information corrected. While personal information errors don't affect a consumer's credit score directly, it could signal a possible identity theft or other fraud. It could also lead to more mistakes in your report.

By understanding your credit score, the factors that influence it, how it's calculated, and the steps you can take to improve it, you'll start thinking a bit more deeply about whatever debt you might be considering. 

Furthermore, working to improve your score also develops healthy financial habits. It will help build a foundation for your journey towards financial wellbeing. How will you know specifically what you did right and what you did wrong in your financial journey? It's through your credit scores and reports. Once you know and understand these pieces of information, you can determine the best ways to improve or maintain your credit standing.