What is a Credit Score?
You’ve probably heard about credit scores before and about how important they are. But what is a credit score, and why is it important?
Your credit score is a number that lenders use to help them understand how likely a creditor is to pay them back.
Your credit score takes into account if you’ve paid your bills on time, any open credit you have, and other things that might indicate your creditworthiness. These factors are all condensed down into a number, and that’s your credit score.
Lenders prefer debtors with good credit scores because there is less risk of them missing payments or defaulting on the loan completely.
Someone with a good score probably has a stable income and is responsible enough to pay their bills on time. On the other hand, those with a bad credit score might have a bad credit history, or they just might not have enough of a credit history to have a good score.
Why You Should Care About Your Credit Score
Having a good credit score will give you access to benefits and opportunities that those with low credit don’t have.
It will be easier to get approved for things like loans and credit cards. Even if you manage to get approved with bad credit, you will have to pay higher interest rates than those with good credit.
Also, with good credit you may pay less for insurance or smaller security deposits. States are starting to pass laws on how insurance companies are able to use your credit score.
Your credit card company uses your credit score to determine what your interest rates are, and the interest rates can change very quickly. If your credit score drops your credit card company can raise the rates, even if the drop in credit score was caused by something else.
Your credit score is important, but it’s not the only factor that matters. Having a good credit score will certainly help, but the interest rate you get also depends on other things. Other things that are taken into account are the type of loan you want, and the type of asset you plan on buying.
Finding Your Score
There are three main credit bureaus: Experian, Equifax, and TransUnion. Each year, you are entitled to one free credit report from each of the bureaus. But what about your credit score?
Tip: To find your credit score, you might be able to use your credit card company. Discover, Barclays, Citi, and Chase all give you access to your credit score. Not all credit card companies offer this, but it is becoming increasingly common.
If your card company doesn’t offer credit scores, don’t worry. You can find your credit score online for free. Sites such as CreditKarma.com allow you to see your credit score for free. However, some sites are sneaky and will find a way to get you to pay somehow. Be careful and read the fine print.
In the case that you don’t care if it’s free or not, there is always the option of paying for your credit score. It should only cost about fifteen to twenty dollars.
Understanding Your Score
There are multiple credit scores available and they each have their own range, but the FICO method is the most common. For example, the range of a FICO score is 300 – 850, but the range of an Equifax score is 280 – 850.
No matter which credit score you use, the higher the number the better it is.
Whether your score is considered good or bad will depend on the method used, but generally it goes like this.
- 300 – 629 Bad
- 630 – 689 Fair
- 690 – 719 Good
- 720 – 850 Excellent
The percentage of people who fall into each range are fairly evenly distributed, with the average score being around 695.
Increasing Your Score
Your credit score changes often, and is based on your current credit report. If you have a bad credit score, or if you just want to increase it even more, there are some things you can do about it.
- The good news is if you have bad credit, it might not be your fault. Credit reports often contain errors that hurt your score. If you catch these errors you can have them removed from your report, instantly increasing your credit score.
- Reduce the balances on your credit cards. Credit companies look at how much of your overall credit you’re using. If it looks like your credit cards are almost always maxed out, that is hurting your score. Spreading your bills out over several cards will make your look better to creditors even if you’re still spending the same amount of money.
- Avoid letting people make too many inquiries on your credit report. Lots of credit inquiries over time will lower your score. If you do need to make multiple inquiries, do them over a short time frame so they count as one inquiry.
- You’re still free to check your own credit report as it won’t affect your credit. Those unsolicited pre-approved cards that come in the mail won’t affect your score either.
- Don’t open too many new credit card accounts before applying for a loan. Having more available credit will boost your credit score in the long term, but it causes a negative dip in the short term.
- Don’t take out too many loans as it not only increases the amount of debt you have, but also makes you look like you’re financially struggling.
- Age counts, so keep your oldest accounts active if possible. An old card that you don’t use will eventually be canceled by the card company. To avoid that, have it make a small automatic payment every month. This will prevent the credit company from canceling the account and will keep your score high.
- It should go without saying, but pay your bills on time. 35% of your credit score is based on your payment history. If you’ve had a history of missing payments your credit score will suffer, but there is hope. Recent history carries more weight than non recent history.
Final thoughts on your credit score
Bad credit is a slowww burn. Being at such a disadvantage, continues to hurt you over the life of your loans by way of higher interest rates. Take the steps above to increase your credit score. It’s a long haul process, but it’s worth it.