Credit Score 101: Know its importance and the factors that affect it

Your credit score is the foundation of your financial identity, it’s the number used by lenders as an indicator of how likely you are to repay your debts. It’s a rating that reflects your financial habits and credit history, which financial institutions use to assess your risk as a credit applicant.

Per TransUnion Philippines, a credit score is rated from 300 to 950, with 950 being the highest. This means that the higher your score, the better. These five factors impact your score:

1. Your credit use — Do you have high credit amounts or outstanding balances?
2. Your credit appetite — How often do you apply for new credit accounts?
3. Length of credit history — How long have you had credit?
   
4. Delinquency measures — Do you have missed payments on your accounts?
   
5. Your paying habits — Do you pay on time? Do you pay in full or just a portion of your balance?

When you have a low credit score, it will be difficult for you to get credit in times of emergencies or financial distress, and you will be subjected to higher interest rates when you apply for a loan (e.g. car loan, housing loan, personal loan), pushing you deeper into debt.

To avoid this from happening, make sure you do the following:

• Spend only what you can pay for.
  
• Pay your credit card bills and loans on time, and in full as much as possible.
• Create a budget to manage finances more effectively.
  
• Avoid opening new and unnecessary credit accounts.