What is a Credit Score?
“A credit score is a three-digit number that rates an individual's creditworthiness and ability to obtain a loan, mortgage, or credit card. A credit score is based on a person's credit history, which includes their active accounts, total debt levels, and repayment history.”
“Lenders use credit scores to evaluate an individual's ability to repay loans.”
What is it made up of?
five main factors are evaluated when calculating a credit score:
Payment history (35%)
Payment history: Your payment history includes whether you've paid your bills on time. It takes into account how many late payments you've had and how late they were.
Amounts owed (30%)
Amounts owed: Amounts owed is the percentage of credit you've used compared to the credit available to you, which is known as credit utilization.
Length of credit history (15%)
Length of credit history: Longer credit histories are considered less risky, as there is more data to determine payment history.
Types of credit (10%)
Credit mix: A variety of credit types shows lenders you can manage various types of credit. It can include installment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards.
New credit (10%)
New credit: Lenders view new credit as a potential sign you may be desperate for credit. Too many recent applications for credit can negatively affect your credit score.
Side-effects of a bad credit score:
Limited Access to Loans: Banks may deny you credit cards, car loans, or personal loans because you look like a higher-risk borrower.
Higher Interest Costs: You’ll still get loans, but you’ll pay much more in interest — costing you thousands extra over time.
More Expensive Insurance: Insurers may charge you higher monthly premiums because lower credit can signal higher financial risk.
Fewer Job Opportunities: Some employers check credit reports, and poor credit can hurt hiring or promotion chances in certain roles.
Harder to Rent an Apartment: Landlords may reject your application or require a cosigner or larger deposit.
Upfront Deposits for Utilities: You may have to pay security deposits to start services like electricity, internet, or phone plans.
No Access to Top Credit Card Rewards: The best cash-back and travel rewards cards are usually only available to people with strong credit.
Slower Wealth Building: High interest and limited financial options make it harder to save, invest, and build long-term financial stability.
