by: holli casto
Demystifying Credit Scores
Credit scores are a vital part of your financial well-being, but the whole process can feel like a mystery without understanding what goes into calculating your credit score. To answer, "What is a credit score?" First, you have to know why they exist in the first place. Anecdotally, think of when you're out to dinner with a friend. If they've always paid you back in the past, you'd be more likely to pay for their dinner in the future. This is a very simplified example of how credit scores work.
A good credit score is important to your financial well-being because it makes you a stronger candidate for a loan application when applying for a loan. When you need to make large purchases, like buying a car or a home, you don't have the cash to purchase these things outright. These are situations when you would need to take out a loan. That said, financial institutions will look for assurance that you will pay them back for their loan. This is where your credit score comes in. Your credit score indicates how likely you are to repay the money you owe.
Credit scores look at five elements of your financial history to determine your credit score. These five categories are payment history, credit utilization, length of credit, credit report inquiries, and credit mix. The combination of these categories makes up your credit score.
