A credit score is highly important to each man, woman and child because they play such a significant role in our financial lives. For example, your credit score determines whether or not you can get a mortgage loan and whether or not you will have a credit card. Let’s explore what a credit score is and how you can have the highest one possible.
What Is a Credit Score?
A credit score predicts your financial behavior. For example, lenders use it to determine whether or not you are a good risk for repaying a loan. They make this determination based on the information that people report to the credit bureaus. This information determines your credit score.
Lenders and other companies use the credit score for a variety of purposes. A bank asks for your credit score to determine whether or not you qualify for a mortgage. A credit card company uses your credit score to set the credit limit they will give you on a credit card.
A lender seeks your credit score to set your interest rate. If you have a high credit score, the lender will be happy to give you a low interest rate. Because your credit score is high, this means that you are a good risk for paying your bills and repaying your loans, so they will reward you with a low interest rate on your auto loan. A low interest rate means that a smaller amount of interest will be added to your monthly payments, so a high credit score makes your auto loan cheaper for you.
We can look at this from the other side as well. If your credit score is low, the lender may not approve you for an auto loan, but this does not always happen. A lender may approve you, but he or she will give you a high interest rate. A high interest rate adds a higher amount of interest to your monthly loan payments, so the auto loan will be much more expensive for you.
Many more people are beginning to ask applicants for their credit scores than they have in the past. One example is employers. In order to apply for some jobs, the employer may ask for your credit score. That is because your credit score tells people more about your history than just your financial history. For example, an employer may want to know how well you handle your finances if you apply for a job as an accountant.
How Is the Credit Score Determined?
The credit bureaus Experian, TransUnion and Equifax use several factors to determine your credit scores. These include the following:
• Do you pay your bills on time?
• How much unpaid debt are you currently holding?
• What type of loans do you have, and how many do you have?
• How old are your accounts?
• Do you have any available credit left to use?
• Did you apply for any new credit cards?
• Is there a bankruptcy, foreclosure or debt collection on your reports, and how old are they?
How Many Credit Scores Are There?
Although people talk about a credit score, no one has just one credit score, and they may all be very different. That is because people use different data to calculate a credit score. They also use different scoring models, and this results in different scores. They can even depend on the day that someone calculates the score.
What Are the Credit Scores that You Can Have?
Credit scores range from 300 to 850. In general, people divide these scores into bad, fair, good and excellent categories. If your credit score is 629 or below, lenders and other people believe that these are bad credit scores. Scores from 630 to 689 are a little better and are in the fair range. Scores from 690 to 719 are known as “good” credit scores. Excellent credit scores go from 720 and higher.
What Does not Affect Your Credit Score?
Everything does not affect your credit score, and this may be good news for some people. The information that does not affect credit scores tends to be demographic information, such as your age, whether or not you are married, your gender, and your race or ethnicity. You also do not need to be concerned about your employment history, so the amount of money you make will not be a factor. The neighborhood you are currently living in also will not be taken into consideration.
How Do You Improve Your Credit Score?
It is important to have the highest credit scores possible because this makes everything easier for you. When your credit score is high, you are not likely to be turned down for loans, you receive the lowest interest rates on your loans, and people believe that you are a moral and ethical person. If your credit score is on the low side, you can increase it by doing the following:
• If you have not been paying your bills on time, start making every effort to do so from now on.
• Do not use more than 30% of the credit limit you are allowed on your credit cards. Ideally, you should use even less if you can.
• Do not close older accounts because this increases the average age of all of your accounts.
• Do not submit too many credit card applications at one time. When you apply for a new credit card, it affects your credit score negatively, but it is only a temporary glitch. If you have too many applications open at one time, your credit scores will take a beating.
• Apply for an installment loan along with credit cards.
It is also a good idea to obtain your credit reports every year. Then, you can make sure that everything is correct and that there isn’t anything negative that is pulling your scores down. If you find that there is anything on your credit reports that does not belong there, you are entitled to dispute it with the credit bureau and have it removed. This will increase your credit score.