Demystifying Credit Scores

Credit scores can be confusing!

How are they calculated?

Why do they go up and down?

How important are they really?

In this episode of the Money is Emotional podcast, I'm demystifying credit scores and answering your burning questions about the subject.

Here's what we cover...

What is your credit score and how is it calculated?

Your credit score is a moving target and there are numerous variables that affect it. 

Credit scores are based on five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). There are different types of credit scores for specific purposes (such as mortgages or auto loans). Currently, there are 44 different credit scoring models!

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Credit scores range from 300 (Poor) to 850 (Excellent). Why did they pick this range? Who knows! 🤷‍♀️

There are things that affect your credit score in ways you wouldn’t expect.

You could do something financially awesome, like pay off your mortgage, and your credit score can DROP. I know, because it happened to me! Listen to the episode for more surprising ways your credit score can go up or down.

Should you worry about your credit score if you don’t want to borrow money? 

Actually, yes you should! Your credit score affects other things besides your ability to borrow, like renting an apartment, car insurance rates, and obtaining certain jobs. You also want to monitor your credit score and credit report to catch potentially fraudulent activity. 

Can someone establish or improve their credit score without taking on a lot of debt? 

Absolutely! Find out what you should do to keep a good credit score, even if you want to be 100% debt free. We also discuss building credit with a secured credit card, a “credit builder loan”, or with a joint card or loan.

Your credit score isn’t the best measure of your financial success!

It’s only one indicator of financial health, and definitely the most important one. Other things to consider: monthly cash flow, savings rates, income, and net worth. Your credit score is like the number on a scale – it doesn’t tell the whole picture of how financially healthy you are.

If you won $10 million in the lottery today, your credit score wouldn’t go up one point! 

The bottom line: Be aware, but not obsessed with your credit score! Do financially healthy things and it will naturally come into a good range.

Related: I’m Banning the Budget