You may be in a good place with personal finance, having eliminated debt and saved a lot of money for emergencies. These are the easiest aspects of personal finance to apply attention and effort to. Most people don’t do these well, so if you have, give yourself a pat on the back. But the next level of financial preparedness is a little more difficult to understand. Think of it as the algebra of personal finance, if debt and savings are the arithmetic.
Personal credit is vitally important to understand, if you want to gain wealth and live with a measure of comfort throughout your life. While there are many different subtopics to discuss, with regard to personal credit, we are going to talk about the concepts of personal credit health and the all-important credit score. About 25% of UK adults don’t even know what a credit score is, according to a recent survey by icount.
A credit score is a reflection of your overall credit health. It’s a number that a lender can look at, and quickly know how responsible you will likely be if they decide to give you a loan. A credit score is based on many actions you’ve taken throughout your life. As an adult consumer, you use money in a lot of ways. You pay utility bills, make car payments, pay off medical expenses, pay off credit card debt, and all sorts of other actions.
In each of these scenarios, you are interacting with borrowed money. Unless you are fairly wealthy, you didn’t have enough cash on hand to buy your car outright, or to pay the entirety of your knee surgery. So you’re paying off those expenses a little at a time, while a large financial entity covered the payments for you in the meantime. Those entities are lenders, just as the utility company lends you the use of their energy every month, waiting for you to pay it at the end.
If you are negligent in these payments, it shows future lenders that you don’t have your finances in order. They’ll therefore charge you much higher interest, to make up for the time they have to wait for payment, and to cover the possibility that you might not pay at all! These higher charges will accumulate over the span of your life, and in the end you will have paid tens or hundreds of thousands more to live your life, than someone with a good credit score. Suffice to say, you can’t afford to ignore your credit health!
