A credit score is a singular numerical representation of an individual's accumulated credit behavior. The purpose of the credit score is to very clearly illustrate whether or not a consumer has behaved responsibly when utilizing lines of credit over a period of time. When it is stated that your credit score is probably the single most important representation of who you are, it is absolutely true.
There are three primary credit reporting agencies in United States which are Experian, Equifax and TransUnion. These three reporting agencies collect monumental amounts of financial information about each individual which utilizes credit. When you make a purchase on your credit card at a gas station or apply for a job with a background check, your credit score is either directly affected by or plays a part in your everyday life.
So the question is what exactly makes up your credit score? The two largest factors which affect a person's credit score our payment history and credit utilization. The payment history is exactly what it sounds like. If you have an auto loan, mortgage payment or numerous credit cards, you almost certainly will be making monthly payments. Your ability to make these monthly payments on time and for the correct amount speak volumes on your responsibility for managing finances. If you've ever seen a credit report, each line of credit has a grid representing the months over a period of years. Each square on that grid has an icon which denotes how a payment was made, whether it was on time or late and if it was for the right amount. This credit history factors heavily into a credit score and provides an immediate visual representation of whether or not the consumer consistently makes responsible financial decisions by paying their debt.
Credit utilization is the amount of available credit in relation to the amount of credit currently being used. Ideally only 20% or less of available credit is currently being used which is the best point for positively affecting a credit score. This is because the more credit which is being used the more likely it is a person will get in over their head by assuming too much debt and fall behind on payments. Utilizing less credit, while not as bad, shows that a person is unlikely to use any additional credit provided by lenders and therefore will not make interest payments on outstanding balances. Consumers who pay their bills in full every month don't really make a lot of money for financial institutions.
There are many other factors which affect a credit score such as personal bankruptcy, foreclosure and inquiries from prospective financial lenders. It is necessary to understand why a credit score is important because it can affect everything from obtaining a mortgage to getting a job. Building good credit over a long period of time resulting in a high credit score has many positive effects. Many prospective employers will look at your credit report as well as the credit score especially for jobs where money is involved. A credit score will also have a direct impact on interest rates for future loans such as automobile and home as well as the ability to obtain credit in the first place. An individual's credit score might be the single most important number in their life, unfortunately some consumers do not realize this until it's too late and get in over their head by taking on too much debt.
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