Do you really know the purpose of your credit score? Most people know they have a credit score and have some vague idea that it some kind of indicator about their credit but unfortunately that is where the knowledge stops with the vast majority of folks. For as important as your credit score is for a wide variety of things in your daily life, which extends far beyond just your ability to get credit, it is truly beyond comprehension that more people do not pay intense attention to it.
Do you even know what your credit score is right now, or even what it was last month or the month before? Surprisingly, most Americans do not, and even more surprisingly, neither do they care. But the reason they don’t care is because they figure as long as they are not getting nasty letters from creditors or phone calls from bill collectors, their live score credit score must be just fine.
Nothing could be further from the truth.
First let’s back up a step. Your credit score is a number which is calculated by the credit bureaus that indicate how much of a credit risk you are. When you go to apply for credit, the lender will pull copies of your credit report and look at that score, which tells him how much RISK he is taking on by approving your loan, and if that risk is uncomfortable for him, he will compensate by offering you financing at higher interest rates.
But simply paying your bills on time is not the only factor that goes into calculating your credit score figure. True, it accounts for about 35% of the score, but where does the other 65% come from?
How close you are to your credit limit on your credit cards plays a significant role. The ideal place to be is about 25% to 30% of your credit limit in terms of your outstanding balance. If you have less than that, then you are not using credit enough to get a clear picture. If you have more than that, then the thought is that you are not using credit responsibly enough. And if you go over your credit limit, that is definite negative credit score points, in addition to the overlimit fees that the card issuer will assess. Talk about adding insult to injury!
As mentioned earlier, your credit score is used in many more places than just when you go to apply for new credit. Various companies use your credit score to determine whether or not they should send you flyers and notices about super special sales, and if your credit score is not up to par, you’ll never know about those special sales. Many car insurance companies are now using your credit score to determine what rates to charge you for your car insurance, since they allegedly have statistics which prove that people with lower credit scores make more claims than those with good and higher credit scores. If you are looking for a new job and there are several job candidates that are all pretty much equal, the credit scores of the applicants will play a major role in determining which applicant gets the job, sometimes having more weight than even lesser skills or capabilities.
You need to check your credit report multiple times per year and see what it says about you. There is a better than fair chance that your credit reports contain errors, like some charged off account that does not belong to you but is on your report anyway. This and other similar things will cause your credit score to be calculated much lower than it really should be.