How Do Credit Scores Really Work?

Assalamu Alaikum girlie! 🌸

Today we’re talking about the sacred credit score.

With some people putting it in their marriage or social media bios, credit scores have become a symbol for how responsible and/or wealthy you are in the eyes of many.

But what on earth is this random number? How is it calculated? And what role does it play in your wealth-building journey?

That’s exactly what we’ll explore. Let’s dive in👇

What is a Credit Score?

First, a credit score is a 3-digit number that represents your creditworthiness.

Lenders, landlords, and even some employers use this score to assess how responsibly you manage debt and make payments. The most commonly used credit scores are FICO scores, ranging from 300 to 850.

In other words a credit score is an “I love debt and can repay it on time” score.

Credit Scores = Financial Success?

A credit score doesn’t say anything about your financial success other than how good you are at managing debt.

Scenario 1: Say you have a 450 score today and win $1,000,000 tomorrow (yay!), it will have ZERO effect on your credit score.

Scenario 2: Say you have an 800 score today but you’re living paycheck to paycheck; this struggle is not reflected on your credit score (if your bills are on time).

Your credit score is important if your goal isn’t to live a 100% debt-free lifestyle. And if that’s your game, here are some ways to build credit without a credit card:

• Make Loan Payments: Paying off your debts, especially federal student loans can help build your credit history as these payments are reported to the 3 main credit bureaus (i.e. Equifax, Experian, and TransUnion).

• Report Rent Payments: Some property managers and landlords report rent payments to credit bureaus which can positively impact your credit.

• Paying Bills on Time: Paying bills like phone plans with your name on it can positively impact your credit score. You can contact your utility companies to explore their options. beware: you might get some pushback at first

Living With and Without a Credit Score

Life with a Good Credit Score:

1. Can Quality for No Interest Loans: With a good credit score, you qualify for no interest rates on loans.

2. Better Loan Approval Chances: Lenders are more likely to approve your loan applications.

3. Higher Credit Limits: You can access higher credit limits, giving you more financial flexibility.

4. Rental Approvals: A credit score might make it easier to rent an apartment or a car as lenders can review your history quickly.

Live Without a Credit Score:

1. No Temptation to Overspend: Higher credit limits can tempt you to spend beyond your means. You’re probably more likely to stay within your means, pay cash for things, and exercise delayed gratification .

2. Focus on Assets: When you don’t focus on building a credit score, you use your actual assets and the money in your bank account to measure your financial wellness.

3. Renting an Apartment/ Car: It’s a myth that you cannot rent an apartment or a car without good credit. It might require a deposit to do these, but it is possible!

4. Buying a home: You CAN buy a home without a credit score. Again the process is different but you can undergo manual underwriting. Real people are doing it!

Note, not having a credit score doesn’t mean you have a bad one. If you have a bad FICO score (670 and below), then it needs to be cleaned up. Having no credit means a) you’ve never had any form of debt/ line of credit or b) you pay off all your debts, don’t take on new ones, and after a few years the score disappears.

Understanding the credit score game will give you the information you need to choose the game you want to play. Whether you want to build a good score or want to go debt-free, each path has it’s challenges- so choose your hard wisely.

Until next week, stay safe and blessed!

Your right-hand girl,

Fatimah ✨

p.s. Schedule a 30-min call to build your financial future today! (It’s FREE- no strings attached)