Since their inception in 1989, credit scores have been the core determining factor in finding out a person’s creditworthiness. While we’re pretty sure that everyone has some idea of what credit scores are, there’s still a ton of misinformation out there regarding this statistical analysis. It’s important to maintain a good credit score, and the only way of doing that is knowing its ins and outs. With that said, here’s a rundown of what credit scores are, what they mean for your future, and how you can make yours look more appealing to different financial institutions.
What are credit scores?
A credit score is a three-digit figure that gives lenders an overview of your credit report. This usually falls between 300 and 850, and only 1.4% of Americans have the perfect rating of 850. This also varies depending on which credit score agency your lender decides to use. If you’re looking to get a mortgage or loan, lenders and financial institutions look to your creditor to determine if you qualify for the loan and what payment schemes are suitable for you.
How is my credit score calculated?
Every credit score agency has its own way of calculating a person’s credit score. However, they often keep a tight lip on how their algorithm works because this is proprietary information and the variables used in the credit score statistical model constantly change. But, there are a few known factors that affect your credit score.
Indeed, Petal Card’s guide to credit scores lists the many aspects like payment history, credit utilization, and credit age and history as some of the key things that are taken into consideration. This means that how you pay (or don’t pay) your bills and loans, how much available credit you use, and for how long, all play a role in your credit score.
Moreover, having a diverse mix of credit can also help improve your credit score, as this shows that you’re able to keep up with a number of different debts like mortgages, car loans, or credit cards. On the other hand, frequently requesting for hard inquiries and applying for new accounts can drag your credit score down since this signifies that you might be having a hard time to meet your bills.
What are the benefits of having a high credit score?
Other than being able to qualify for a loan, a great credit score can open you up to a myriad of financial opportunities. Obviously, having a high credit score means that you’re able to pay your debts on time — so your lender may trust you with lower interest rates, approve your loans faster, and increase your borrowing capacity. Avid travelers also benefit from having a higher credit score. That’s because it will be easier for you to apply for a travel credit card that can earn you points and miles, if you don’t have one yet. You can get lower interest rates for your credit card purchases as well.
Another great thing about having a high credit score is that this may reduce or even eliminate security deposits on your next apartment. Apartment Guide’s article on security deposits points out that landlords appreciate it when a tenant is responsible with their finances and that their financial accounts are still intact. Similarly, auto insurers can also use your credit score to gauge your auto insurance premiums — potentially reducing it if they see that you’ve been a good borrower.
How can I improve my credit score?
If you feel like your credit score is in a bad position now, don’t fret! Experian reports that a third of scorable Americans have bad credit, so you’re definitely not alone. Making your way up to a good score can take some time, but rest assured, you can get there by doing these simple steps: pay your bills on time, keep your balances low, and knowingly stop when you’ve applied for too much credit.
Furthermore, it’s best to know where your credit score stands, so try to take advantage of your annual free credit score report from credit reporting agencies like TransUnion, Equifax, and Experian. By doing this, it will help you understand your current standing, and you can adjust where needed. Overall, the system behind calculating credit scores can be incredibly complicated. However, you can actively keep your credit score at a healthy level by being a responsible borrower and knowing how to keep your budget under control.
Don’t let the numbers get to your head — just try to do your best to keep up with your debts and be mindful of your spending, and surely, a good credit score will follow. For more information, do check out our guide on ‘How to Check Your Credit Score for Free’.
