Your credit score is one of the most important numbers in your life. It can determine whether or not you get approved for a loan, and it can also affect the interest rate you pay on that loan. A good credit score can save you thousands of dollars over the life of a loan, so it’s important to understand what goes into your score and how you can improve it.
What Is A Credit Score?
A credit score is a three digit number used by lenders to assess your creditworthiness. Your creditworthiness deems how likely you are to pay back any borrowings based upon your credit history.
Credit is any type of borrowing including loans, mortgages, auto loans and credit cards. When applying for any type of credit, the lender needs to know the risks of lending to you. They can do this by accessing your credit report and assessing it alongside your credit score.
Learn important financial terminology here; A-Z investment and financial terms to know.
How Are Credit Scores Calculated?
A credit score can be calculated from assessing the information contained in a credit report. A credit report is important as it contains your credit history. This includes the type of credit used, how often credit has been applied for and any missed payments.
Your score determines everything from the amount you can borrow to the interest rates offered. The higher the score the more likely you are to be accepted for credit. It also gives a greater likelihood of taking out credit on more favourable terms such as a lower interest rate. This is why it is essential to check your score before applying for any type of credit.
What Is A Good Credit Score?
FICO scores are the industry standard for assessing creditworthiness and are used by 90% of the top US lenders. They deem a good credit score as between 670-739. The main scoring ranges are listed in the table below.
|Credit Score Range||Rating||Description|
|580 and below||Poor||Below average score. Indicates that the borrower is not very creditworthy and may be at risk.|
|580-669||Fair||This is still below average but still likely to be accepted, likely on less favourable terms.|
|670-739||Good||Average score range that most lenders will accept.|
|740-799||Very Good||Above average score that demonstrates good creditworthiness.|
|800+||Exceptional||This is a good credit score, well above average and a borrower is considered very low risk.|
Having a lower score doesn’t always mean you will be rejected for credit as each lender is different. But it can exclude you from the top offers. Lenders may have stricter criteria such as lower credit limits or higher interest rates. It’s also important to note that scores change over time and can go both up and down. There are several ways to help improve your score which will be covered in the next section below.
Find your FICO score range with the free FICO score estimator.
How To Improve Your Credit Score
If you have a poor credit history then don’t worry there are several steps to take to help repair it and improve your credit score.
Check For Errors On Your Report
You should check your credit score in conjunction with your credit report. One issue that can affect anybody, even those with good credit history is a simple mistake on your report.
Your first step is to check your credit report for any incorrect information and get it rectified. This can include missing accounts, duplicate accounts, miss-spelling of a name etc.
It can also uncover instances of ID theft where credit may have been obtained using your details. These could have big implications on your score if not corrected.
Never Miss A Payment
The main factor that makes up your FICO score is your repayment history. It may not seem like much to miss one or two short term payments now but it will affect your ability to borrow in future. Missed and late payments have a detrimental impact on your score as you appear less likely to repay. Always ensure your bills are paid on time.
Are you in danger of defaulting on your debts? View this post explaining the debt default consequences.
Low Credit Utilization
Keep your credit utilization low. This is not so much the amount you borrow but the percentage of the available credit you use. For example, you have a credit card with a $10,000 credit limit and utilize $9,000 (90%) of this. It can appear to a lender that you are over-reliant on credit.
Applying For Credit
Don’t apply for too much credit in a short space of time. Opening too many accounts close together can look risky as again it appears you are over-reliant on credit.
Take Out A Credit Card
Taking out a credit card and repaying your balance in full every month can be a good way to build up a good credit history.
Somebody with no credit history at all is deemed riskier than somebody that borrows but repays without issue. This is because there is no repayment history to base their score on and so they could be high risk.
For those with poor credit ratings there are specialist credit builder cards designed to help improve your score. Learn more about choosing the right type of credit card. This can be a great way to improve your credit score fast as long as used correctly.
See also; how to use credit cards to make money.
Are you struggling with any of the above such as late payments, ID theft or repossessions? Then you could gain professional help from Credit Assistance Network. They can assist with all aspects of credit improvement including disputes and corrections. Get your free consultation.
Good Credit Score Conclusion
To recap, a credit score is a number used by a lender in conjunction with a credit report to determine your creditworthiness. It is used when applying for any type of credit including mortgages and credit cards.
It can affect whether you are accepted for credit and the terms of the deal such as interest rates. The higher the score the better the chances of being accepted and gaining more favourable terms.
A good credit score is not set in stone and can go up or down over time. There are several things you can do to improve your score including; correcting incorrect information on your file, keeping credit utilization low and paying bills on time.
It is always important to check your credit score and the information on your report is in order before applying for credit. The most commonly used credit scores are FICO scores which are used by over 90% of top lenders to assess creditworthiness.
Find your FICO score range and check your credit score with the free FICO score estimator.
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