Episode 277 - Credit Scores & You & What You Should Know

A credit score is a numerical representation of an individual’s
creditworthiness, based on their credit history. It typically
ranges from 300 to 850, with higher scores indicating better
credit health. Maintaining a good credit score is crucial because
it affects various aspects of financial life, including access to
loans, credit cards, rental agreements, and even employment in
some cases. 


Credit scores are typically calculated using the FICO or
VantageScore models, with FICO being the most common. The primary
factors that influence credit scores include: 


1. Payment History (35%): Whether you pay your credit card bills
on time is the single most important factor affecting your score.
Late payments, defaults, or bankruptcies negatively impact this
area. 


2. Credit Utilization (30%): This refers to the percentage of
your available credit that you’re using. For example, if your
credit limit is $10,000 and you have a balance of $3,000, your
credit utilization is 30%. It's recommended to keep utilization
below 30% to maintain a good score. 


3. Length of Credit History (15%): A longer credit history shows
lenders that you’ve been able to manage credit responsibly over
time. This includes the age of your oldest account, the average
age of all your accounts, and the age of your newest
account. 


4. Credit Mix (10%): Having a variety of credit accounts (e.g.,
credit cards, loans, mortgages) shows that you can handle
different types of credit responsibly. 


5. New Credit (10%): Applying for multiple credit cards or loans
in a short period signals to lenders that you may be in financial
trouble, which can lower your score. 


Each hard inquiry can negatively impact your score. Importance of
Maintaining a Good Credit Score 


1. Access to Better Financial Products: Individuals with good
credit scores are eligible for better credit cards with lower
interest rates, higher credit limits, and attractive rewards.
They also have access to lower interest rates on mortgages, auto
loans, and personal loans. 


2. Lower Insurance Premiums: In many cases, insurance companies
use credit scores to assess risk. A higher score can result in
lower premiums for auto and homeowners' insurance. 


3. Employment Opportunities: Some employers, particularly in
financial sectors, check credit reports as part of the hiring
process. A low credit score can raise concerns about reliability
and financial responsibility. 


4. Rental Approvals: Landlords often check credit scores to
assess the likelihood that a tenant will pay rent on time. A
strong credit score can increase your chances of being approved
for a rental property. 


5. Emergency Borrowing: Life is unpredictable, and having a good
credit score ensures that if you need to borrow money quickly in
an emergency, you can do so at favorable terms. 


How to Develop and Maintain a Good Credit Score 


1. Pay Bills on Time: Your payment history is the most
significant factor in your credit score. Missing even one payment
can have a lasting negative impact. Setting up automatic payments
or reminders can help ensure timely payments. 


2. Keep Credit Utilization Low: Aim to keep your credit card
balances below 30% of your available credit. For example, if you
have a credit limit of $5,000, try not to carry a balance higher
than $1,500 at any given time. 


3. Don’t Close Old Accounts: Closing an old credit card can
shorten your credit history and increase your credit utilization
ratio. Even if you no longer use the card frequently, keeping the
account open can positively affect your score. 


4. Avoid Applying for Too Much Credit at Once: Each time you
apply for a new credit card or loan, a hard inquiry is added to
your credit report, which can temporarily lower your score. Only
apply for credit when you need it. 


5. Monitor Your Credit Report: Regularly check your credit report
for errors or fraudulent activities. If you find inaccuracies,
report them to the credit bureaus to have them corrected. This
will ensure that your credit score accurately reflects your
financial behavior.


By understanding how credit scores are calculated and making
strategic decisions, consumers can build and maintain a good
credit score throughout their lives. This will provide them with
access to better financial opportunities and help them avoid the
pitfalls of bad credit.


Watch this episode in its entirety on YouTube:
https://www.youtube.com/@WealthAcademyPodcast/videos 


For a free financial coaching session with Paul:
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