A good credit score can help you rent an apartment, get a loan and make large purchases with confidence. To lenders and sellers, it shows that you’re good with your money. In reality, though, you might be less of a superstar financier than you think. Here’s how to tell if you’re really managing your credit effectively.
What Exactly is a Credit Score?
You’ve probably heard quite a bit now about how important it is to have a good credit score. But what, exactly, is that number? In short, your credit score gives lenders a sense of how big a risk they’re taking by giving you a loan. The higher your score, the lower the risk you present.
You can boost your score by making your payments on time, keeping a low balance on your credit card, and not going over your credit limit. While all of those factors are great news for lenders, they don’t really give the average consumer a sense of how good they are at managing their finances. That’s because credit scores only consider a few money-related behaviors — mostly whether you can pay your bills on time — and may leave out a lot of other information.
Symptoms of a Problem
Even if your credit score is decent, you might have some money issues to address. Here are some red flags to look out for:
- Not tracking your spending. If you don’t know where your money is going, you’re not managing it well. Did you ever cancel that Netflix subscription you stopped using? Why did you spend $50 on Tuesday? By keeping track of your finances, you can identify areas where you can save a bit more and make smarter choices. This way, you can avoid suddenly realizing you don’t have enough in your account when it’s too late.
- You’re paying the minimum balance on your credit cards. While it’s technically not a problem to pay the minimums, it’s a strong indicator that you don’t actually have the money to bail yourself out of debt. This can wreck your credit score in the long run and cost you hundreds more in interest payments.
- Taking shortcuts. If you’re always looking for the easy way out, it’s probably because you aren’t seeking out a long term solution. Focus on the basics of proper money management before opening up a new credit card, as tempting as the added line of credit might be.
- You don’t have an emergency fund. If you suddenly lose your job or need to pay expensive medical bills, how will you keep yourself afloat? Ideally, you have an emergency fund that you can use to support yourself while you make a plan to get things back on track. If you don’t, it likely means you’re having a difficult time saving money.
If you recognize any of these behaviors in yourself, there’s hope for you yet. Keep track of your finances with a budgeting app or old fashioned notebook so that you know exactly what you’re spending and where. Then, commit to saving a little each month to build that emergency fund. Over time, you’ll see your improved money habits reflected in more than just your credit score.