Understanding Your Credit Score
This is the first of several blog posts written to better help you understand your credit score.
Understanding your credit score can be tough. Sometimes, it seems like just an arbitrary number with no rhyme or reason for why it rises and falls. Understanding it better can help lead you to better financial decisions.
It’s important to understand that your credit portfolio is your reputation for borrowing money. Just like a normal reputation, you want to do your best to protect it. Within your credit portfolio are factors and other data that help lenders determine whether you have a good reputation with borrowing money and how likely you are to pay back the money on time.
Your score (the actual number) is just a glimpse at your credit portfolio. It’s your reputation rating. But don’t become too fixated on it. Your score hardly tells your unique story.
Like your age, your credit score is just a number.
It’s nice to have a high credit score, but your focus should be on what makes up your score; not the number itself.
Without getting too technical, your credit score (in most cases) is what determines your interest rate when you apply for credit. It can but doesn’t always determine whether you’ll be approved for a loan.
So…your score is a good indicator of whether you make payments on time; just at a glance. But your loan and payment history are more determining factors; lenders look mainly for a pattern of on-time payments.
It’s not bad to owe money. But avoid owing too much money.
It’s ok to owe money. And in fact, as long as you continue to make on-time, steady payments, it does great things for your credit! You’re building your reputation with those payments.
But owing too much money can count against you. Lenders calculate your debt-to-income ratio (debt relative to income) when you apply for a loan. Take the sum of all your monthly payments divided by your gross monthly income to calculate. Most lenders like when your debt-to-income ratio is no higher than .30 (or 30%). That means all of your monthly loan and credit card payments combined equal 30% or less of your total monthly income.
Anything higher than that can show signs that you may have trouble affording your bills somewhere down the line.
We have a lot more information to share with you! Look for our next blog post soon on understanding your credit. We’ll discuss the speed of paying off your bills and the truths and myths of credit cards. Stay tuned.
