Simply by analyzing your credit and money management skills, you can develop a general idea of your personal financial situation and where it’s headed in the future. You already know if you have money in the bank, a steady income, and whether you can cover your bills each month (with hopefully at least a little left over for recreation and savings). However, few people truly understand their credit situations. When they apply for loans or credit cards, they’re surprised to learn that their credit scores are much lower than they anticipated.
The information on your credit report tracks your credit management habits, such as how much you owe, your on-time payment history (or lack thereof), and who your creditors are. This has little to do with how much money you have in the bank, your income, the value of your assets, or your overall net worth. Simply by making a few late payments or mismanaging your credit, for example, even a multi-millionaire can have negative information on their credit report, which in turn causes their credit score to drop. At the same time, someone in a much lower income bracket could be much more responsible in terms of paying their bills on time and not overextending by using credit cards, resulting in an excellent credit score.
You already know that the more negative information that’s added to your credit report over time, the worse your credit score will be. A low credit score eventually costs money because it keeps you from qualifying for prime rate mortgages and loans, as well as obtaining low-interest credit cards with few fees.