Understand Your Credit Score & How to Improve It

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If you are wondering what your credit score is and why it matters, the answer is that your credit score is going to play a major role in your ability to apply for loans you might need in the future. This could include a home loan, auto loan, or even a student loan. Even if you are not planning on applying for any of these credit services in the near future, there are other reasons why your credit score matters as well. Therefore, you need to understand what your credit score is, how it is calculated, and the impacts it might have on your future financial decisions. We’ve also suggested some websites below where you can access your score for free.

What Is a Credit Score?

A credit score is a way of quickly defining your relationship with potential financial debt into a three-digit number. Depending on the exact formula used to calculate a credit score, the lowest score is around 350 while the highest score is 850.

As a quick rule of thumb, a good score is 650 or above. As long as your score is 650 or higher, you shouldn’t notice an impact on your everyday life. The lower your credit score goes, the more likely creditors believe you are to default on your debt. This costs them money, which is why they care.

How Is Your Credit Score Calculated?

Your credit score is dependent on your financial performance in a few different categories. Some of the factors that will play a role in your credit score include:

  • Your payment history, which is about a third of your credit score
  • How much money you owe, which is around a third of your credit score as well
  • The length of your credit history, which is about 15 percent of your credit score
  • Any new credit you have along with your credit mix, which combine for the remainder of your score

Clearly, there are numerous parts of your credit history that play a role in your credit score. How does your credit score impact your financial life?

The Impacts of a Low Credit Score

There are a few consequences that you might notice if your credit score is too low. These include:

  • About half of all employers conduct a credit check as a part of their hiring processes. If your credit score is too low, the company might be worried that you might not be able to manage the company’s resources appropriately.
  • Some car insurance companies also use your credit score when they are deciding how much to charge you for car insurance.
  • If you have a low credit score, you might not be able to successfully apply for a mortgage or an auto loan. Furthermore, you might end up paying higher interest rates.
  • Many landlords conduct a credit check when you apply for a rental property. If your credit score is too low, you might be denied.

Clearly, your credit score is important. Therefore, what can you do to raise it?

How Can You Raise Your Credit Score?

If you would like to raise your credit score, there are a few steps that you can take. Some of them include:

  • Try to pay down any existing debt you might have. By reducing the amount of debt you carry, you can improve your credit score.
  • Pay off your credit card in full, on time, every month. By generating a longer history of on-time payments, you can improve your credit score.
  • Check your credit report. If you believe your credit score is erroneously low, there might be mistakes on your report. Credit Karma and Experian can help you with this.

Finally, remember that you qualify for one free credit report from the major bureaus each year. Take advantage of these services and make sure that your credit report is accurate.

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