What is a credit score and why should I care?

Unpacking everything behind this 3-digit number

Have you ever heard the term "credit score" but aren't quite sure what it means? Don't worry, you're not alone. Credit scores can seem like a confusing and daunting concept, especially if you don't currently have a credit card, loan or mortgage, but they're actually pretty simple to understand once you know the basics.

So, what exactly is a credit score? A credit score is a three-digit number that represents your creditworthiness - in other words, how likely you are to repay any debts or loans that you take out. Lenders, such as banks and credit card companies, use your credit score to determine whether or not they should lend you money, and at what cost to you, the interest rate.

Your credit score is calculated based on your credit history, which includes things like your payment history, the amount of debt you have, the length of your credit history, and the types of credit accounts you have. The most commonly used credit scoring model is the FICO score, which ranges from 300 to 850. The higher your score, the better your creditworthiness is considered to be.

Now you are probably thinking to yourself.. I don't have a credit card, loan or mortgage, so why should I care?

Well, you may not have any of those today, but chances are you will most likely want one some day in the future, so it is better to start preparing now. Having a good credit score can make it easier to get approved for loans and credit cards, and can also help you get better interest rates.

On the other hand, having a poor credit score can make it harder to get approved for credit, and can result in higher interest rates and fees if you are approved. This can make it more difficult and expensive to borrow money when you need it, and can also limit your options for things like renting an apartment or getting a job that requires a credit check.

Additionally, your credit score can also affect your ability to qualify for certain financial products, such as a mortgage or a car loan. If you have a low credit score, you may be denied these types of loans altogether, or you may be approved but at a much higher interest rate, which can cost you thousands of dollars over the life of the loan.

So, how can you build or improve your credit score?

Firstly, you need to start some type of credit account to begin building your score. The most important thing you can do is to make sure you make all of your payments on time. Most people open a basic no-fee credit card and use it very sparingly to begin. But remember, late payments can have a significant negative impact on your credit score, so be sure to make every payment perfectly on time.

It's also important to keep your credit utilization low, which means not using too much of your available credit.

Finally, try to keep your credit accounts open for as long as possible, as having a longer credit history can improve your score.

Managing your credit score can seem scary first, but once you understand it you can build a strong score that gives you the ability to access money more easily if you ever need it.

*This is not intended to be financial advice. Do not open a credit account without fully understanding the product and terms associated*