According to the Wu-Tang Clan, cash rules everything around me. That may be true if you’re a world-famous bunch of financially-minded rappers.
But for everyone else who can’t fill a duffle bag with dolla dolla bills, we gotta rely on credit – that magical concept that let’s you buy things with money you don’t have (yet). Credit is one of the building blocks of wealth, but you’re not going to get very far without a good credit score, so let’s dive into what they are, why they’re important, and how to get yours nice and shiny.
What the hell is a credit score
A credit score is a number that’s accessible to anyone in the business of lending money, which tells them how risky you might be to lend to – ie. how likely you are to pay back a loan based on your financial history. Think of it as your financial fingerprint, a number that sits on a database and puts you and your financial persona onto a scale of good and bad.
It’s based on all sorts of previous touch-points you’ve had with the credit world, things like:
- applications you’ve made for credit (how many, who and where)
- what types of credit you’ve applied for (home loan, buy-now-pay-later, credit card, phone plan)
- the size of the loan or line of credit applied for
- the age of your credit on file and how well you’ve paid it off
- any defaults you’ve made – when you’ve failed to pay a bill on time or to pay off a loan
- personal information like your age, where you live, and how long you’ve been employed
Why is a credit score important?
A good credit score is the key to the financial castle because this is one of the key things that lenders use to assess
a) whether they should lend to you at all, and
b) what interest rate you should get.
The higher your credit score is, the better you look in the eyes of a lender because it tells them that you’re more likely to pay the loan back. Since you’re less risky as a borrower, they can be more flexible on the interest rate they give you since there’s more certainty that they’ll get the money back from you.
If you have a lower score though, then you’re more of a risk to the lender and they often have to charge more interest to balance out that risk. This is so they can still make money even when some people don’t pay them back.
Knowing what your credit score is so important whenever you’re going in to apply for a loan because it gives you leverage to negotiate with lenders. These days many providers of finance are even giving personalised interest rates where everyone gets a unique interest rate based on their credit score (among other factors).
Now don’t panic if you think you’re stuffed because you won’t have a good score. A credit score is dynamic, it constantly moves up and down based on your financial behaviour.
How to improve your credit score
There are plenty of ways you can improve your credit score, or start to create one if you don’t even have any credit history yet. Fun fact – lots of people think that avoiding credit completely will help them look more attractive to lenders in the future. This is not true though, having no credit history won’t help you get a loan because you can’t prove that you’re a good payer-backer (yes that’s a made-up word).
Things you can do to build a good credit profile and improve your score:
- Have a credit card and PAY THEM ON TIME. Not just the minimum balance, the whole balance
- But don’t get too many credit cards. Applying for credit cards too regularly could red flag you as someone who needs lots of credit all the time (not a good sign)
- Pay all your bills on time – your phone bill, internet, electricity/water/gas etc…
- Try not to jump around jobs or houses… stability is looked upon favourably
If you can do all of this and just generally be on top of your money, then you’ll gradually build up a score you can proudly tell your parents about.
How do I find out my credit score?
The most widely used scale of scoring is done by Equifax which is one of the biggest agencies across the world that tracks and reports on consumer credit. The score is a number between 0 and 1,200.
You can get your score for free from any of these places:
So arm yourself with the information, and use it to your advantage when discussing any type of loan.