What is a Credit Score and Why Does it Matter?
February 7th, 2014 by Jennifer Frankel

cs2Knowledge of your credit score has become increasingly prominent as our importance. The most crucial element of this buzz-worthy topic is to understand what is a credit score and how it affects your finances.

What Is A Credit Score

A credit score is a numerical representation of the potential risk of lending money to a consumer. Your credit score is personal – it is based upon credit report information assembled by credit bureaus that take into account your fiscal responsibility in situations including on-time bill payments, credit card payments, and government and private loan repayments. In the United States the three major credit bureaus who assemble these credit scores are Experian, TransUnion, and Equifax all of whom use different metrics to determine the risk you pose to potential lenders.

When Is My Credit Score Checked

Credit scores are extremely important because it identifies your future risk based on your financial reliability in previous situations. Looking to rent an apartment or a home? Your credit score may be checked. Seeking financing to purchase a new car? Your credit score will come into play when the lender must decide if you are worth the risk as a consumer. So why is a credit score important? If you are an international student, you may not have any credit history in the US. Because of this, you may need a US cosigner or guarantor that signs up to the terms of the contract in case you cannot pay the due amount.

Credit scores range from 300 – 850:

  • Median Credit Score: 711
  • “Subprime” Credit Score: Below 640
  • US citizens are entitled to 1 free credit report per year available on AnnualCreditReport.com

Credit scores do not only impact your ability to get a loan (or your cosigner’s ability to sign for a loan), but may also effect the terms of the agreement. For example, the interest rate, or APR, on your student loan will be effected by either your or your cosigner’s credit score. The better the credit score, the more favorable your interest rate will be.

So how do you avoid blemishes on your credit? Or, if you’ve recently come to the US then you’ll want to build your credit score. In either case, make sure to:

  • Pay bills on time, and do not forget to close out utility bills when moving
  • Do not leave debts outstanding on credit cards
  • Avoid loans for small, personal pursuits (payday loans)
  • Never write a check that you know you don’t have the money to cover
  • Do not break a lease on a rental property or car unless you absolutely have to
  • If you will be late in paying your creditors, let them know beforehand which will encourage leniency

Credit scores will follow you throughout your life. It is important to stay current with your finances and ensure that your credit remains intact to ease the burden of future financial decisions. Staying ahead of the game when it comes to your credit isn’t always easy, but it is necessary for financial stability.

Want more information? Check out our article on What is A Credit Score?

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