Credit scores: mythbusting!
The economy is struggling right now, because pandemic. Nevertheless, credit scores in America recently went up. How does that make sense? Let’s look at what a credit score even is to begin with, and what it’s not.
Five questions about credit scores
What is it? A credit score is a measure of how trustworthy a person is as a borrower. The higher the number is, the more likely that person is to pay back money they have borrowed.
Who decides? Usually FICO, the most common credit score system. Sometimes a credit score is called a FICO score for this reason.
Who cares? Lenders. If you want to buy a car, you may need a loan to do it. You will almost certainly need a loan to buy a house. Whoever is going to lend you that money wants to know that you will pay it back.
Why should you care? You want to have good credit to give yourself the option to buy a car or house at some point. Good credit means a high credit score. Scores range from 300 to 850. A high credit score of 800 will get you speedy paperwork and a low interest rate when you apply for a loan. A low interest rate means you pay less to borrow that money. A credit score of 600, on the other hand, is just ok. You may still get a loan, but you’re going to pay more to borrow that money—and it can be a lot more in the long run.
What can you do about it? Get a credit card, one with no annual fees. Use it for things you know you can afford and make sure you pay it off, in full, every month. That’s every single month, all 12, 100% paid. And be sure to pay your student loans, since these can impact your credit as well.
One big myth about credit scores
Credit scores are NOT a measure of overall financial health or success. They don’t count how much savings you have or how much money you make or how well prepared you are for an emergency.
For example, if Ron spends all the money he makes, has no savings, and manages to pay his credit card bill every month—but just barely—his credit score will be pretty high. But is Ron in good financial shape? Of course not! Ron had better get his act together or Harry will not lend him money and Hermione will definitely dump him.
Don’t be like Ron. Understand your credit score, but don’t obsess over it. Check it out before you make plans to buy a car or a house, but if you’re paying your bills on time you should be fine. And pay attention in herbology.
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Credit scores are really hot right now, and not just because they’re higher during the pandemic. (Bet you thought I forgot! Here’s why.) I think people are obsessed with them because they misunderstand what they measure, which is why I decided to write this mythbusting post.
Personally, I always paid my bills but never much cared about my credit score until I bought a house. Looking at how much money it’s going to cost in interest, and thinking that it could have been MORE if I didn’t have really good credit…. well, I’m glad I’ve always paid my bills.