Whether you’re buying a home or car, looking for business funding, or finding an apartment, your credit score matters. Mortgage lenders, car dealerships, and landlords check your credit history, and if your credit isn’t the best, you may not qualify for certain loans or lines of credit. If you’re approved, you may pay higher interest rates on the loans. This is why it’s important to maintain a good credit history. Here is why your credit score matters and how to improve it.
What Is a Credit Score?
Your credit score is a three-digit number that determines the quality of your credit history. Your credit score ranges between 350 and 800. The companies that determine your credit score are FICO and VantageScore. The companies obtain your credit information from these three credit bureaus: Equifax, TransUnion, and Experian.
Here is the range of credit scores and what they mean for your credit history overall:
300-579: Poor
580-669: Fair
670-739: Good
740-799: Very Good
800-850: Excellent
How Is My Credit Score Calculated?
Several factors contribute to the calculation of credit scores. Your payment history is one factor. Your payment history consists of the number of on-time payments, missed or late payments, and data on bankruptcies and debts in collections. Your credit utilization rate also contributes to your credit score. Credit utilization is how much available credit you use. If you’re using more credit than what’s available, it decreases your score.
The types of credit you have are a factor in how credit scores are calculated. You should have a balanced mixture of credit types to improve your credit score. One type of credit is installment credit. This kind of credit involves borrowing a lump sum and making monthly payments. Examples of installment credit are mortgages, car loans, and student loans.
Revolving credit is a line of credit where you repay what you borrow as needed, but you repay what you borrowed by a certain date. Examples of revolving credit are credit cards, business lines of credit, and home equity lines of credit.
Your credit history’s length is a factor in your credit score. This is why you shouldn’t close out old credit accounts even if you no longer use them. When you have an established credit history, lenders see this as valuable and are more willing to give you loans.
Did you know that requests for new credit affect your score? There are soft inquiries and hard inquiries. The main difference between soft and hard inquiries is who pulls the credit. If a lender, employer, or credit card issuer inquires, it’s a soft inquiry. If you inquire for new credit, it’s a hard inquiry. Hard inquiries affect your score negatively, but soft ones won’t.
Why Do These Scores Matter?
One reason credit scores matter is that when you have a higher score, it qualifies you for loans with lower interest rates. If you want the best credit cards with those cool rewards, travel perks, and favorable rates, you’ll need a good credit score. Shopping for a house is more effective when you have good credit because the lender gives you a loan with the best interest rate available. This also applies to buying a car.
When you buy home or car insurance, your credit is a factor. Without the best credit history, you’ll pay higher insurance premiums, bringing up your costs each month. If you have credit cards, a good credit score can help you obtain higher credit limits on those cards.
How You Can Improve Your Credit Score
One of the best ways to improve your credit score is to pay bills on time to avoid interest and late fees. Get copies of your credit report from these credit bureaus: Experian, Equifax, and TransUnion. You can find the reports on AnnualCreditReport.com. As you look over your debts, watch out for errors. If you see errors, dispute them online or in writing. The bureaus should remove the errors within 30 days.
Use no less than 30% of your credit on your credit cards to avoid high credit utilization ratios. Pay off what you charged weeks before the due dates, if possible. Set alerts on your phone to remind you when payments are due. If you made a huge purchase on your credit card, pay down the balance in small amounts until it is paid off before you make new purchases on the card.
Get a Secured Credit Card
If you’re rebuilding your credit or using it for the first time, get a secured credit card. A secured credit card is a type of credit card where you deposit a specific amount of money, and this money is your credit limit. If you deposited $400 on a secured credit card, $400 will be your credit limit. You’ll use this card like a regular credit card and pay balances before or by the due date. Your activity on the secured credit card shows up on your credit reports, and it boosts your credit score. Some secured card issuers turn your secured card into an unsecured card after a year if you make timely payments consistently.
Set Up Automatic Payments
If your busy lifestyle causes you to forget when bills are due, simplify things by setting up automatic payments. However, you should only use this method if you tend to keep money in your checking account most of the time. If you have irregular income, this may not be the best option.
Building a good credit score is all about showing lenders you’re responsible with money. By paying your bills on time and keeping your credit use low, you’re setting yourself up for better deals on loans and more financial freedom down the road. It might seem complicated at first, but with consistent effort, you’ll see your score improve.