What Is the Value of a Credit Score?
Anyone struggling with debt could also be dealing with a low credit score. In modern banking, credit scores determine everything from getting a loan to renting an apartment. They’re often seen as a reflection of financial responsibility, but they tell only part of the story. Many hardworking people with financial challenges can have low credit scores through no fault of their own, whether due to unexpected life events, medical bills, or job loss.
But what exactly is the value of having a good credit score? And is it necessary to achieve debt freedom? We’ll cover these questions and more in our simple guide to help you better understand credit scores. In it, you’ll learn:
- What a credit score is and its purpose
- hen good credit is required
- How to manage a solid financial future with less-than-perfect credit
- The value of credit-building strategies
With these tips, you’ll understand how to manage your credit score to create a solid financial future for yourself.
What is a credit score, and why is it important?
A credit score is a three-digit number that lenders use to determine how likely you are to repay what you borrow.
Three leading credit score companies provide this number, so it’s common to hear it referred to as a TransUnion, Equifax, or Experian credit score. The score is determined based on your credit report, a complete record of how you have managed debt throughout your history.
Factors that go into calculating your score include:
Payment history: Are you making your required payments on time?
Outstanding debt: What percentage of your available credit are you using, and what is your total debt amount?
Credit age: How long have you managed your accounts and credit?
Types of accounts: What is the mix of unsecured (like credit cards) and secured (like home loans) debt you hold?
Inquiries for new credit: Are you applying for new lines of credit or loans? If so, how often?
What is considered a good credit score?
Each of the three leading credit score companies has its own charts (depending on whether it adheres to FICO® or VantageScore); however, they all provide the same general indicators. Generally, a 600 credit score and 650 credit score are considered fair, while a 700 credit score and 750 credit score are considered good.
Pro Tip #1
Get a free credit score report today – it’ll save you time and trouble. But make sure it’s the main one you get per year. Otherwise, it’s considered a hard credit inquiry and can impact your credit score.
Traditionally, a credit score is essential as it is the foundation for borrowing money to improve one’s quality of life and establish trust with creditors.
But that isn’t always the case.
When is good credit needed?
One myth about consumer finance is that good credit is vital for a good life. But good credit doesn’t actually buy you anything. In fact, the whole point of having good credit is to allow you to borrow money on terms in your favor rather than directly purchasing something.
For example, having good credit is essential if you want to purchase a house, car, or make an expensive transaction. It may help you secure better rates and terms on the loan, allowing you to pay off your debt faster and at a lower cost.
On the other hand, if you need some cash for an emergency or short-term expense, a vacation, or shopping, then good credit won’t be necessary. You can often find ways to pay these expenses without a high credit score.
So, if you are stressed about purchasing with poor credit, don’t be. You may meet more criteria than you’d think when performing everyday financial activities with less-than-perfect credit.
What truly matters is learning how to manage your finances with confidence and making progress at your own pace. Whether you’re rebuilding, maintaining, or just starting out, remember that good credit can always be earned back, and it’s never too late to start.
How to manage a solid financial future with less-than-perfect credit
While poor credit is not ideal, it doesn’t mean you can’t achieve your goals. Many people with low credit scores live happy and successful lives. The truth is that several other factors are important in any loan process, and keeping your credit score in check is just one of them but not always the most important.
For example, those with low or poor credit scores (<580) may still qualify for a loan if they have other assets or factors in their favor. This could include having a steady income, enough savings to cover the loan payments, and responsible payment habits with proof from past utility bills and rental agreements.
On a positive note, you don’t need the highest credit score. Be aware that not being able to keep up with loans and payments when you have less-than-perfect credit can further damage your score.
To avoid this, establish a budget and stick to it, even when times are tough. Doing so will help you keep up with payments, protect your credit score, and ensure you’re in a better financial position if you want to apply for other loans or lines of credit down the line.
The value of credit-building strategies
Credit-building strategies help establish and maintain a good credit score to achieve financial freedom. They are also vital to building a solid financial plan that helps get you out of debt and into a stress-free life.
Secured credit cards
A secure credit card can be a great way to get the credit you need while building your score. These cards require a deposit used as collateral if you default on payments. They generally have lower interest and fees than unsecured cards, and issuing banks report your payments to credit bureaus, helping you build your credit history over time.
Payment reminders
Paying bills on time is one of the best ways for anyone with a low credit score to start rebuilding it and staying on track. Payment reminders help ensure monthly bills are paid on time and in full.
Pro Tip #2
A reminder is not the actual payment, so if you have trouble following through, consider setting up automatic payments so that the money is taken out of your account before there is a chance to forget.
Regularly check your credit report
Sometimes, your low credit score may be an error on the credit reporting agency’s part and no fault of your own. However, by checking your credit report regularly, you can ensure that any errors or other factors that may damage your score are immediately addressed.
Low credit is not always a problem
Credit is only one of many factors used in major financial decisions from banks like loans and mortgages. So, if your credit is less than perfect today, many options are available to help you get by as you build up to the best credit score possible.
With the right strategies and help, even low credit scores won’t keep you from turning your financial goals into reality. For those who are in debt and have a low credit score, it is normally suggested to focus on getting rid of the debt first and then focusing on increasing your credit score.
If you’re in debt and dealing with a low credit score, you can enroll in a debt relief company to help you on the path of financial freedom.
Disclaimer: The information provided in this article is for general informational purposes only and is not intended as legal, financial, or professional advice. We do not guarantee any specific outcomes, and results may vary based on individual circumstances. We comply with all applicable laws, including the California Debt Settlement Services Act, and recommends consulting with an attorney or financial advisor before making any financial decisions. We are not responsible for the accuracy of external links or content, and all website content is protected by copyright laws. We reserve the right to update or remove content at any time without notice.
Frequently asked questions
What’s the difference between a FICO® score vs. credit score?
While they may sound like two different things, they are actually the same. To be more exact, a FICO® score refers to a type of credit score that creditors use to determine loans.
What credit score is needed to buy a house?
Lenders typically look for a credit score of at least 620 to buy a house. Higher scores can secure better mortgage rates. Call your bank to see if you have a unique case.
Why is my credit score going down?
Your credit score can decrease due to several factors, such as missed payments, high credit card balances, or applying for new credit.
Why did my credit score drop for no reason?
Your credit score might drop unexpectedly for several reasons, such as report delays, credit utilization changes, or inaccuracies. As mentioned earlier, regularly checking your credit report for any discrepancies is essential.
How often is a credit score updated?
Credit scores are updated whenever new information is reported to the credit bureaus, typically every 30 to 45 days. However, the exact frequency can vary based on your creditors’ reporting habits.
What is the highest credit score possible?
The highest credit score possible is typically 850 on the FICO scale, one of the most used scoring models. Achieving this score indicates an exceptional credit history and financial behavior.
When was credit score invented?
The credit score was invented in 1958 when Bill Fair and Earl Isaac introduced the first credit scoring system, called Credit Application Scoring Algorithms. This system marked the beginning of modern methods for evaluating creditworthiness.
Can I improve my credit score while I’m still paying off debt?
Yes, absolutely. Improving your credit score doesn’t require being completely debt-free, it’s about how responsibly you manage the debt you have. Paying bills on time, keeping credit card balances low, and avoiding unnecessary new credit applications can all help raise your score over time. Even small, consistent improvements in your payment habits can make a big difference.
Disclaimer: The information provided here is for general informational purposes only and does not constitute legal, financial, or tax advice. Laws and regulations vary by state and individual circumstances, so always consult a qualified professional for personalized guidance.
