Do you know what your credit score is? Did you know that those three little numbers have the power to change your life? Your ability to take out a mortgage, obtain a small business loan from a bank, and open a credit card with the best rewards all hinder on having a good credit score. A credit score is a three digit number calculated from your credit report and is one of several factors used by lenders to determine your creditworthiness. In other words, the bank uses this number to determine if you are trustworthy enough to pay back the money they just lent you to make a large purchase.
Credit scores generally range from 300 to 850 depending on the company. There are three big credit bureaus that track your credit score: Experian, TransUnion, and Equifax. Did you know that each year you are legally allowed to pull your credit report from each of these credit bureaus for free? Your credit report is different than your credit score. In fact, your credit score isn’t even on your credit report. Your credit report contains information such as your name, social security number, balances and available credit on credit cards and loans, and when you opened credit lines and much more. Errors sometimes happen on your credit reports so it is important to check them yearly as they can negatively affect you in the future. To access your free annual credit report head over to Annual Credit Report to download it.
Also Read: The Importance of a Good Credit Score for Truckers
Credit scores are calculated using five factors:
- Amount of balances owed (35%) - About a third of your credit score is determined by the ratio of credit you have available and the amount of money you owe on each line of credit.
- Payment history (35%) - Another third is calculated based on how many time you have paid your bills on time and in full.
- Length of credit history (15%) - About 15% of your credit score is the length of your credit history. Chances are the older you are the longer your credit history is and that’s a good thing. Unfortunately this is a negative for many young people who are just starting a credit history.
- Credit mix (10%) – A variety of credit – credit cards, mortgages, auto loans, etc. – is a good thing for your credit score as it indicates that you’re responsible and can manage your finances.
- New credit (10%) - Opening new credit can ding your credit score a few points.
So, what is a good credit score? Scores fall between 300 and 850. Anything below 630 is bad and you will most likely be denied credit cards and loans and pay high interest rates. Anything around 690 is considered good credit with 720 to 850 being excellent. If you have good credit you’ll pay a low interest rate on loans and qualify for most credit cards.
Your credit score is a fluid number. It changes constantly, but should stay within a few points of itself over time as long as you don’t close all your accounts at once or just stop paying all your bills. One of the best things that you can do is track your credit score overtime. Credit Karma is a free website that lets you see your credit scores from TransUnion and Equifax. Credit scores will vary per credit bureau so don’t be worried if you see different numbers.
Also Read: 6 Steps to Eliminate Credit Card Debt
If you currently have bad or fair credit there are ways to increase your credit score in time. Here are some tips to improve your score:
- Make monthly payments in full and on time
- Automate your monthly payments if you can
- If you have any bills in collection then you need to take care of them immediately
- Never close your oldest credit account
- Keep your balances low (some financial planners recommend using less than 30% of your available credit on each credit line)
- Check your credit report yearly for errors and fix them right away if you find any
While credit scores might not seem fair, they are part of our lives. If you want to make big purchases, like a new truck or house, then you need a good credit score. If your current credit score is good then congratulations! However, if your credit score is not so great at the moment, you can fix it over time with a little work.