You might have heard of the term ‘credit score’ thrown here and there. If you’ve been hearing it more often these days, it’s probably because of its importance. You’re in the age where everyone starts to care about things such as a ‘credit score.’
There’s no need to feel like an oddball, though. You’re part of the majority. According to a study, there’s a gap between financial literacy and the young crowd. However, there’s a lot of resources that can help bridge the gap. One source of information is the internet, of course. It doesn’t just have reliable sources. It’s free, too.
Speaking of the internet, that’s probably why you’re here. It’s about time you know what a credit score is. It’s important to know how financial decisions impact your credit score.
Welcome To adulthood.
What is a credit score?
A credit score isn’t that complicated of a concept. You see, it’s like a test you take in school. The higher the score, the better.
A credit score is your score in terms of your credit; the higher your score, the more likely you are eligible for financial transactions, like loans. A high credit score makes you look trustworthy to lenders. It shows that you’re financially responsible enough to pay your loan.
Additionally, your credit score is composed of your credit history activities (i.e., credit cards, loans, and mortgages)
How is it calculated?
Your credit score is determined by the following:
- how much you’ve borrowed in the past
- how many credit applications you’ve made so far
- whether you pay on time or not
The next time you have to make a significant financial decision, consider these three points.
You can calculate your credit to keep tabs on it. There are various calculators available online.
Why is it important?
Your credit score affects your ability to make auto loans, home loans, credit cards, and more.
Before any loan is approved, lenders want to know just how trustworthy you are in terms of credit. A high credit score promotes confidence in lenders. This makes them trust that you’re going to hold up your end of the bargain. This increases your chances of getting approved for loans.
Live within your means
It feels great to spend money on yourself, especially when you worked hard to get that paycheck. Although spoiling yourself once in a while is fine, remember not to spend more than you earn. That sounds like a no-brainer, but it’s a mistake many people make.
Let’s say you want some new tech. You can’t afford to pay for it on the spot. It costs more than your salary. So you opt for home installment. Ask yourself, ‘will this be a financial burden for me in the future? Do I really need this? Should I really be spending money on one thing that has a price tag bigger than my paycheck?’
Set a budget tracker
The whole world suddenly feels bigger as soon as that paycheck lands on your hands. You feel invincible. Fight the urge to spend thoughtlessly. Remember to practice self-control.
Budgeting is the foundation of responsible financial planning. Before spending on things that you want, prioritize your needs. Groceries, rent, bills, car maintenance, insurance, etc. You know, adult things.
After allocating money for these, you can then set aside some money for leisure. Don’t forget to set aside some money for emergencies or savings too.
If you need help quantifying your budget tracker, there are various budget calculators available online.
Don’t build the habit of loaning
You’re in your 20s. It’s normal to want to have fun and experience new things. To want to enjoy life being financially independent. This is all fine and well, as long as you’re aware of your expenses. Don’t get carried away that you lose track of your expenses. You might end up loaning out of need. This can become a dangerous cycle that’s harmful to your financial freedom.
Build habits that won’t cause any financial issues for yourself in the future. Practicing mindful spending this early. This helps prevent unnecessary financial burdens in the future.
Someday, you’re going to want your own house or your own car. You’re going to want a piece of land in a great area or be able to pay your mortgage without a snag. You can attain all this with a good credit score.
If you don’t become financially responsible today, the story will be different. Irresponsible spending habits will damage your credit score. Start practicing responsible spending today and thank yourself later.