Your credit score is a crucial factor for a wide range of financial decisions, from signing up with a mobile phone carrier to securing a mortgage for a new home. It can impact everything from the interest rate you pay on your credit card to whether or not you'll qualify for a loan or line of credit in the first place. Let's look at exactly what a credit score is, what makes a good credit score and how you can improve yours.
What is a credit score, exactly?
A credit score is a number calculated by using the credit reports tied to individuals, which list things like payment histories for bills and loans and existing debt, as Equifax explained. Credit scores as a range of numbers aren't strictly defined by any overarching law or regulation, and there is more than one system used to calculate scores. The FICO score, which is the most common type of credit score, generally falls between 300 on the low end and 850 on the high end. In all credit scoring systems, a higher number means a better score. Payment history, debt burden, length of credit history, types of credit used and recent searches for credit all play a role.
In a practical sense, your credit score represents your creditworthiness or level of risk as a borrower, Investopedia said. People with high scores have a history of past financial actions that make them seem like dependable borrowers who are likely to pay back a loan or line of credit and stay current on bills. This means approval for new credit cards, loans and other financial considerations are more likely. It also leads to more favorable terms for loans and lines of credit.
People with lower credit scores are seen as higher risks, which makes financial considerations more complicated or difficult in many instances. Potential issues include being denied for loans and lines of credit and facing higher interest rates (which financial institutions may impose to make lending to a riskier borrower worth their while), and lower credit limits.
What is a good credit score?
Experian, one of the three major consumer credit reporting agencies, breaks the credit score range into five categories:
- 300-579: Very Poor. This score makes things especially difficult and costly for borrowers.
- 580-669: Fair. People with fair scores will likely face higher interest rates and may be disqualified for various loans.
- 670-739: Good. This score means a better chance of qualifying for loans and lines of credit, but interest rates will likely be higher than the lowest available.
- 740-799: Very Good. Lower interest rates and other benefits start to appear with this score.
- 800-850: Exceptional. This best possible score category means paying less in interest and fees and a general expectation - although not absolute surety - that credit and loan requests will be approved.
How can you improve your credit score?
The benefits of a high credit score are not only straightforward, they're also very important. If you want to cut down on spending tied to interest rates and fees as well as be more confident in your ability to secure loans and lines of credit, you can take some steps to boost your credit score.
- Regularly review your own credit report. Reading through this important document helps you identify any incorrect or erroneous statements, such as a late payment or unpaid debt, that could drag your score down for some time to come. Despite some claims to the contrary, requesting and reviewing your own credit report won't harm your credit score. You can access your report yearly from annualcreditreport.com, a free, government-backed website that provides this information.
- Pay your bills on time. A history of on-time payment is one of the easiest ways to boost your credit score. You just have to be consistent. Paying your credit card bill regularly and keeping the balance low also means keeping credit utilization low, which is a positive
- Try to keep older accounts open. The length of your credit history has an influence on your score. The longer you have an account open, the better. While sometimes you need to close a card, make these choices thoughtfully. Similarly, try not to open many new accounts in a short period of time. This can also lower the average length of your credit history.
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