According to FICO, the average credit score in America for 2021 is 716. In general, this is a good credit score, but it’s only the average score, and about 11.1 percent of American consumers have poor credit scores, i.e., scores less than 550. Are you one of them?
Credit scores are based on several factors that make up your financial portfolio and history. They give lenders an idea of your creditworthiness and can affect several key financial decisions for you.
A good credit score can open up a lot of opportunities, and it can also help you avoid bankruptcy.
Understanding How Credit Scores Work
Credit scores are calculated using a number of different elements from your financial history. But there are two major credit-scoring companies in the US, FICO and VantageScore, and their methods of generating credit scores aren’t exactly public.
However, with the large expanse of information made available, experts have been able to take fair guesses at how these scores are calculated.
In general, it’s essential to know that credit scores are between 300-800. Scores between 300 to 549-79 are considered extremely poor, while scores above 750 are excellent.
Credit scores are calculated using your credit history from any of the three consumer credit bureaus, i.e., TransUnion, Experian, or Equifax. Based on the publicly available information, credit scores are based on your payment history, your debts, credit history length, new lines of credit, and the credit types you have.
The lender uses your credit score to determine the chance of you paying them back, i.e., they use it to analyze the credit risk.
What Do Credit Scores Mean for Your Financial Future?
A lot of people don’t really look into their credit scores unless they’re buying a house or taking out a loan. But credit scores continue impacting your life in one way or another, both in the present and in your future.
Credit scores have very far-reaching effects on your finances, and they can affect your future financial goals directly and indirectly.
Here are some ways credit scores today will impact your financial goals and decisions for years to come.
A Direct Impact on Your Mortgage Rates
A good score will help lenders feel confident that you’ll pay them back promptly; this will lead to a lesser interest rate on your mortgage loan.
In simpler terms, a higher credit score means lower interest rates, whereas a lower credit score would mean higher rates, given the fact that a low credit score implies a higher credit risk.
Mortgage rates paid over several years can add up to significant amounts and, therefore, will lower interest rates; you’ll be saving tons of money down the line.
Your Employment Prospects Could Be Affected
For some jobs, your credit score does matter. Your employer may look at your credit report before hiring you. This doesn’t mean they’ll look at your exact score, but they’ll basically want to see how much you owe in debts.
This is important for jobs that have you dealing directly with money, for instance, jobs in finance departments and accounts. If your credit report shows missed payments and high debts, you might be considered a risk for the company, mainly due to the chances of embezzlement.
Credit Scores Matter When You Need Business Loans
A lot of people wrongly believe that personal loans have nothing to do with your business loans, but they couldn’t be more wrong. Any financer you approach will need your credit report to see how financially sound you are.
While, of course, other factors related to the business will come into place, your credit score will matter too.
It Will Decide Where You Live
Credit scores can also decide where you’ll live today or ten years from now. In order to live in your dream house in your chosen neighborhood, you need a good credit score.
Landlords will choose tenants with higher credit scores when given a choice. The better the house is, the more people it’ll attract, and therefore with plenty of choices, a landlord would pick the tenant that’s most sound financially.
It’ll Decide How You Live After Retirement
A credit Score does directly impact your saving potential. Low credit scores basically mean that you owe more than make you make. And while paying your debts, you aren’t likely to save a lot. And accumulating debts are typically a never-ending cycle that makes savings impossible.
And without saving and high amounts going into premiums and interest rates, you’ll have nothing save for retirement. Your quality of life would be impacted throughout with a low credit score.
If you’re worried about your financial future and can’t see a way out of your debts, reach out to the debt relief specialists at American Debt Enders. They’re a debt relief company and can help you through their debt relief program. They can also help you with credit restoration.
About the Author
The author is a former debt relief counselor with years of experience in the field. They use their experience and their vast knowledge of FTC guidelines, credit collection intricacies, debt relief, and credit restoration to write insightful articles for those dealing with overwhelming amounts of debts.