People have all kinds of strategies when it comes to achieving financial independence. There is no single path that will get you there. Some people have amazing jobs. Others save like Life itself depends on it. Other people learn about the mechanics of personal finance, to learn behaviors that will put them in advantageous financial standing moving forward. This last strategy is the one most like the one we’re talking about today.
Credit scores and credit histories are murky subjects for most people. It takes some research and interest to root out problems in our credit histories. Most people don’t even understand what a good credit score is, or why it exists. But both of these personal finance realities are essential to your future financial life. If you want to achieve wealth, as easily as possible, you’ll want to do the work of improving your credit score and history.
A credit score is a record of every financial transaction you’ve made with a service provider, lender, or financial institution during your adult life. Every time you pay off a credit account on time or set up an automated utility payment that doesn’t bounce, your credit history takes on another positive memory about you. When you don’t pay your bills on time or you have accounts sent to collections, your credit history gets negative marks.
These negative and positive history components help put together your credit score. You may ask what is an excellent credit score? Usually an excellent score is from 750 to 830. Less than 10% of consumers have credit scores like this. That’s all well and good, but what does such a credit score mean?
Credit scores are clues to lenders about how responsible a potential borrower will be with money. If someone can’t handle money, they’ll be likely to take out a loan and never pay it back. The lender doesn’t want that. Some eliminate this risk by not issuing loans to people with low credit scores. Others issue loans to people with poor credit, but they charge a ton of interest. This interest is extra money that a person pays back each month, over and above the monthly premium associated with that loan.
Paying extra money every month, on every loan you have, causes people with poor credit scores to have less money overall for their entire lives. With a mortgage and one or two car loans (at least) a person with poor credit might pay $10,000 more in a year than a person with good credit – at least! Over the course of life, people with poor credit miss out on hundreds of thousands or millions of dollars, all slipping away to payments they would avoid if they had improved their credit.
There are many ways to improve a credit score. The two most important are to pay all bills on time and not to be reliant on credit, whenever possible. If you manage to pay off your debts, and stick to these behaviors, your credit will steadily rise and you’ll start to advantage yourself and your financial future.