What is a Credit Score?

If you turn on any radio, television, or stroll through the world wide web you are bound to run across dozens of adds about improving or maintaining your credit score. What is it? How is it calculated? What’s my score? How does it really affect me? All of these are common questions when tackling the ins and outs of your credit history and the associated score. In an attempt to make what may seem complicated simple, let’s answer a few of the most frequently asked questions about the credit score.

What is a credit score? A credit score (aka debt score) is simply a number assigned to you based on how well you manage debt between 300-850, where a higher score is considered a better.

Who determines your credit score? There are three credit reporting bureaus who gather your “credit history” (aka debt history) and use it to calculate your score: Experian, TransUnion, and Equifax.

What determines my credit score? Your credit score is solely determined by your credit history and is broken down into the following categories and assigned a value by each reporting bureau as seen below.

                           

Is my credit score important? At a glance yes. Your credit score is used by nearly every lender to determine how credit worthy, or in other words, how risky of a borrower you may be. And while most lenders look at other financial information not included in your credit score when making their decision to lend to you, most use your score as a starting point. But if you are wanting to know the complete truth, the credit score is nothing more than a debt score, meaning you have to have debt, live in debt, and continually use debt well to “build” a good credit score. If you look at all the information used to determine your credit score you will see that it has nothing to do with your income, job selection, bank account levels, job track record, savings, or even good investing over the years. It ONLY CALCULATES YOUR DEBT management!

If you follow my blog you know that my goal is to push you towards is getting out of debt so you can be free to save, invest, and truly live financially free one day. Continually living in debt just to build a better “debt” score so you can go into even more debt is not the path to winning financially. Paying off debt and becoming debt free is a sure way to free up cash flow that can be used for more important things like saving a 3-6 month emergency fund, investing for retirement, and doing anything else you want with cash!

There are several other important issues regarding your credit score and the reporting that goes in to creating it, but I don’t have the time needed to go into it all in this post. Two good references to look at on this issue are AnnualCreditReport.com and the education tab at MyFico.com.

The Seven Deadly Sins…

I read a lot of financial articles and books, but few really catch my attention like this one did. Why? Because of how true it was. Most financial articles candy coat the debt crisis facing many Americans by pointing to better “management” of the debt being needed, or “safer” debt instruments that could be used. This is the first main-stream, secular article in years to speak the truth about debt plainly. So with that preface, I’d encourage you to read the following article called “The Seven Deadly Sins That Lead to Debt” by Sheyna Steiner.

“Financial sinners won’t have to wait for the afterlife to be punished for their various misdeeds. Plenty of consequences await in the here and now. Presented with choices daily, human beings can lead chaste and charitable fiscal lives. Or they can succumb to fleeting temptations and fatal traps. So choose to commit these deadly sins — or work to bring a little temperance into your spending.” (click here for the rest of the story)