Credit scores, a number between 300-850, measures how reliable you are as a borrower. Credit
bureaus, like Credit Karma, TransUnion, or Equifax, calculate your credit score through factors like
income, punctuality in repaying loans, the number of hard inquiries into your credit score, and the
amount you have in outstanding loans.
Anything over 700 is generally considered good credit, while numbers below 550 are considered
poor. Maintaining good credit is undoubtedly one of the most important steps in achieving solid
financial health. With good credit, you will qualify for rewards cards, lower rates on mortgages or car
loans, and even better banking services. Young people, or folks who only have a short credit history,
usually need to spend years building their credit score and proving that they are trustworthy
borrowers.
Poor credit makes your financial life unduly complicated and stressful. Since a low credit score
indicates less reliability in repaying loans, creditors almost always charge low-credit applicants much
higher interest rates—if they’re willing to extend loans at all. To illustrate, take this hypothetical: Jill
has sterling credit (above 750), while Jack has a lousy credit score (let’s say 450), and they both apply
for the same three-year lease on a car. The car dealership might offer to lease the car to Jill for $200
per month, while Jack might have to pay $400 per month. Over the course of the loan, Jack ends up
paying thousands of dollars more for the lease, all because his credit score was bad. If we apply this
same scenario to a mortgage, Jack might end up paying tens of thousands of dollars more.
The royal road to good credit is making your payments on time and avoiding unnecessary debt.
Derogatory marks, notes that credit bureaus make when you miss a payment, can depress your credit
for months or years, especially if you’re hit with more than one. Opening too many lines of credit or
taking out too many loans can likewise bog down your score. If you’re saddled with large loans, like
many recently graduated students, you may not be able to achieve a good credit score even if you
make your payments on time. Finally, if you agree to become a guarantor for someone (in other
words, you agree to cosign a loan for a friend or family member with a low credit score), your own
score can plummet if the borrower makes late payments or defaults on the loan.