Imagine being just one class away from graduating and having the professor tell you that passing the class all hinges on taking one final exam. “No problem!” you think. You’re good under pressure. But then she tells you that you won’t have any idea what the test will be about. That’s not pressure. That’s insanity!
But fortunately, credit scores are nothing like this.
Say you had a few credit cards and were thinking about closing a couple as a way to improve your credit score. No problem. A quick Google search should inform you what to do. One of the largest credit scoring companies is kind enough to have an article on their website titled, “Improve Your Credit Score.” Let’s see what clear and understandable tips they have for us:
“Simply closing two accounts not only lowers the number of open revolving accounts (which generally will improve credit scores), but it also decreases the total amount of available credit. That results in a higher utilization rate, also called the balance-to-limit ratio (which generally lowers scores).”
After reading this simple explanation from the credit scoring company, I have a simple three-letter response for you: WTF?!?!
And welcome to the world of credit scores.
Trying to figure out what goes into a credit score is like asking Marshawn Lynch what he thought of the game.
Here’s what we do know about credit scores:
- Your credit score is a number that is supposed to represent your credit worthiness and your ability to pay back debt.
- There are several different companies that provide credit scores.
- The more popular companies issue a credit score within the range of 300 and 850.
- The higher your credit score, the better your credit worthiness.
- Your credit score can change over time.
- Credit cards, banks, and other lenders rely a great deal on your credit score to determine if they want to lend you money.
- More and more employers check credit scores before they hire.
So what’s the big deal about your credit score?
A low credit score is no bueno. If you have a lower credit score, credit cards and banks may still lend you money, but they may not lend you very much and/or they will charge you a higher interest rate. Over time, you could easily pay several hundred thousand dollars more. Insurance companies may jack up your premiums if you have a low score. And that’s not all! A low credit score can prevent you from getting a job.
Getting stuck with a low credit score really sucks.
It’s the modern day Scarlet Letter, but in this case, you get screwed after being branded.
Wouldn’t you like to know how your credit score is calculated? Well, you’re going to be in for a very big surprise in the next lesson.
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.