Yes, you should care about your credit score!

I've recently re-connected with one of my closest friends from high school and she's been a huge inspiration in encouraging me to keep on digging into financial issues, so this one's for her!

First of all, let's start with the basics.

What IS a credit score?

Your credit score is a value typically ranging between 300 and 850 and is a way for institutions to asses your creditability. The closer you are to 850 the better. In theory this number tells someone how creditworthy you are or how likely are you to pay your bills. This score is then used to determine whether or your not you're approved for a line of credit, plays a part in determining your credit card limit and can pre-approve you for additional credit.

Your credit score is based on credit reports from one of the three main credit bureaus:

1. Experian

2. TansUnion

3. Equifax

There are multiple ways of calculating your credit score, but FICO is the most popular and widely used. The credit bureaus all have their own ways of calculating a credit score but think of them as directional and don't get hung up on needing a single, exact score.

*Don't fall in the trap of subscribing to contractual gimmicks to get your credit score. Keep reading, take it all in and in my next entry, I'll show you a great website that gives you your credit score for FREE. No credit cards or social security number needed, promise.

Why is your credit score important?

Higher credit scores can help you with the following:

1. Qualify and obtain a loan at a lower interest rate

2. Get a higher credit limit

3. Ensuring there's no fraudulent marks on your report that could be hurting you and making sure no one has stolen your identity

4. Get a house or apartment - landlords can request to check your credit

What's considered a good credit score?

Unfortunately there's no exact answer but generally anything above a 700 is considered a good credit score.

What affects your credit score?

Per FICO, more than 20 factors in five different categories are considered when calculating your credit score

1. Payment history - (35% of your score) This is based on how well and often you pay your bills and I mean ALL of your bills. Payment history takes into consideration your credit cards, retail accounts and details on late or missed payments along with public records like bankruptcies, unpaid tickets, and money owed to collection services.

2. Amount you owe compared to available credit - (30% of your score) This factors ALL of your open accounts and looks at the how much debt you have in comparison to you total line of credit.

3. Length of credit history - (15% of your score) Start establishing your credit as soon as possible! Remember that having a credit card doesn't mean you should max it out. The longer you have had and shown that you can use credit the higher your score will be.

4. New credit - (10% of your score) Open accounts sparingly and only as you need them. Trying to open or opening multiple credit card accounts within a short period of time hurts your credit score. Think about it, you're opening numerous accounts and the agencies don't know how you'll handle it, can you pay off your debt? Are you responsible? You've got to prove yourself and build up your credit history slowly...

5. Types of credit - (10% of your score) This part of your score considers the different types of credit you're using and the total number of accounts you have. For example: credit cards, store accounts, car loans, student loans, mortgages, etc...

In essence a high credit score SAVES YOU MONEY! You can qualify for credit cards at lower rates and obtain important loans that can help you buy a car or even a house.

Stay tuned to learn how to get a FREE credit report and the 10 common myths about credit scores...