by: Paul Hughes

What is a credit score, what makes this number so important and why do some people dread hearing what their credit rating is? Your credit score is basically a measure of how well you have been managing your legal debt obligations, and an indicator of how likely you are to pay back future loans and credit extensions. Your credit score will determine the amount of loan a bank or creditor is willing to give you, as well as how much interest they are going to charge you for the use of their money – the higher the credit score the more money you’ll be able to borrow, and the lower the interest rate will be.

A credit score was once just used in the financial sector to establish a guideline for banks to be able to set the appropriate terms and conditions when lending you money. But over the years it has become a key player in defining individuals as a risk factor to all sorts of other industries. For example, insurance companies have their own in-house underwriting guidelines and algorithm to factor in your credit score when they quote you a new insurance policy (mainly auto policies).

Because of all the stigma surrounding subprime loans and predatory lenders in recent years, many young people have developed a debt-phobia and have strayed away from applying for and using credit all together. They insist on using cash for all their purchases and live by the creed of, “if I can’t afford it, I won’t buy it.” This model is great, but it has its limitations. Unless you’re a millionaire or a trust fund baby, you’ll eventually need a good credit score to finance your dream car, house, or even land your dream job – yes, I said your future employment could depend on your credit score.

With the abundance of available workers in this current economy, many employers are starting to look at your credit report to correlate your credit habits to your work ethics. So even if you’re planning to live in your parent’s basement for the rest of your life, rely on public transportation, and never make a purchase greater than your paycheck you will eventually need to have a decent credit score to get that job you’ve been eyeing.

Stay on top of your credit rating and be proactive. Even if you’re not planning to apply for credit anytime in the near future, make sure you review your credit report at least once a year, which you can get at www.AnnualCreditReport.com for free from one of the three major credit reporting agencies. Don’t be afraid, take your report out to dinner and look at the pages intently and just be honest with it. Just like any relationship, the more you know about your credit report, the better off you’ll both be.

Sources:
http://sethgodin.typepad.com/
http://www.annualcreditreport.com
http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx
http://www.bankrate.com/brm/news/insurance/credit-scores1.asp
http://www.phobias-help.com/Debt_Phobias_and_Overnight_Money.html
http://www.jobacle.com/blog/2010/5/6/5-credit-risks-that-could-keep-you-unemployed.html
http://www.lendingtree.com/credit-resources/advice/credit-scores/what-do-credit-scores-mean/

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Categories: Features, MBA
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