According to a recent icount survey, about 25% of UK adults do not understand the concept of a credit score. Other nations like the U.S. have found similar, or even higher, levels of credit ignorance among their citizenry. This isn’t good, folks. And it’s not good for the people who are the least informed. Those who understand credit scores know that they’re easy enough to keep healthy. But for people who haven’t the foggiest, credit scores are just a heap of numeric phantasmagoria. Ignorance of personal credit realities won’t keep bad things from happening to you. In reality, bad credit can cost you many thousands over your lifetime, and prevent opportunities from coming your way.
For one, bad credit will make it impossible to get a loan. Or, if you are able to get a loan, it will be much more expensive than it would be if you had good credit. Let’s say you are trying to buy a house. You’ve saved up for you downpayment of 25k or so. But you have to take out a loan for the remaining $200k. If you have bad credit (expressed by a low credit score) a lender will still give you the money, but they’ll make you pay a lot more interest. This interest will total tens of thousands over the course of a 30-year mortgage loan. It would be much less if you have a better credit score when you started. Of course, you won’t feel the loss of that money all at once. The effect will be gradual. But it will be enough to prevent you from having extra money to save, invest, or use to improve your lifestyle.
After 30 years, you’ll be in a much worse place than someone with a good credit score, especially after the above situation plays out in every loan you take out for life (education, car, home, other real estate, etc.).
But how do you get a good credit score? Well, there isn’t any one way to do it. A credit score reflects LOTS of different financial actions which you make throughout your life. If you pay bills for utilities, each missed payment will drag down your credit score. If you apply for credit frequently, this makes you look like you don’t have cash on hand and you need credit to survive. It could also mean that you buy lots of stuff you can’t afford, skating by on credit. This also makes you look bad, and drives down your credit score. You can probably imagine other scenarios that would convince a lender that you you are a risk, financially speaking.
How do you reverse this? Luckily, a credit score may respond quickly to smart actions on your part. Pay off debts, pay bills on time, eliminate debt, and don’t have more credit than you use (but don’t use more than 30% of the available credit limit associated with any credit card or account). If you practice behaviors like this for a year or more, you’ll soon see that you credit score has risen from the ashes! And you’ll save a lot of money in the future.