No one really thinks about their credit score until someone asks you for your credit score. Little do we realize credit scores play a huge role in your financial freedom, from purchasing a cell phone plan to getting pre-approved to buy a home. A credit score is a score from 300 (lowest) to 900 (highest) that reflects your borrowing habits. A high credit score is an indicator to banks/lenders that you are more likely to make credit payments on time.
A credit limit is how much you are given to spend on a credit product. For example, your credit card has a limit of $5,000. If the purchases/balance on that credit card exceed $5,000 you will face overdraft fees and that will negatively impact your credit score.
Pro tip: If purchases/an existing balance accumulates to over 25% of your credit limit, you're likely to decrease your credit score. Let's say you have a credit card and your credit limit is $1,000. If your existing balance is $300, you are using 30% of your credit card. Using most of your credit card shows banks/lenders that you are living off your credit card. An easy way around this is to accept a credit limit increase whenever your bank offers it. If your credit limit is $10,000, as long as the balance is less than $2,500 and you're planning on paying it off swiftly, your credit score won't be affected.
A revolving payment is one that you make on a monthly, quarterly or annual basis. Any revolving payment involving a credit product (i.e, credit card or credit line) will be pulled in a credit report. For example, your phone plan, student loan payments etc. Any bank or mortgage agent can see how many times you've been late to pay your phone bill. Any late payments negatively affect your credit score.
Bear in mind there are specific payments that won't show up on your credit report. For example, even though you make monthly payments to your car insurance provider via a chequings/savings account, it won't show up on the report. On the contrary, your existing student loan will in fact be listed on your credit report.
There are two main organizations in regards to credit reports. Equifax and Transunion. When you request your credit information for yourself, this is considered a "soft inquiry". Soft inquiries do not impact your credit scores. You can check your credit score/report as many times as you like.
"Hard inquiries" are inquiries when a person other than yourself pulls your credit report. This could be a cell phone provider checking to see if you have good credit or a mortgage agent trying to sort out your finances. Hard inquiries can decrease your credit score by a few points so be sure to keep track of how many hard inquiries you've accumulated.
The easiest solution is to make your payments on time. Don't be late on your phone bill and set up an affordable payment plan for your existing loans.
Avoid necessary revolving debt at any cost. Most credit cards have a 21 business day grace period from the moment you make a purchase. Aim to pay off that purchase within this time period to avoid gaining interest. Try to use your debit card/cash much as possible and save your credit card for certain purchases only.
The good new is, if you have a low credit score, with smart, careful and purposeful borrowing habits, you can increase your score within a matter of months!
Unfortunately, not having a credit product will lead to not having a credit score at all. A lack of a credit score is much worse than having a low credit score.
Oddly enough, how you manage debt (in the form of a credit card, line of credit, student loans or car lease payments) leads to credit history which lenders will try to make judgments from. Signing up for a credit card, opening a line of credit and managing your spending habits wisely should be your priority.