Credit scores are impactful, but many people do not know what they are and how they are determined. Your credit score can affect many aspects of your life, even some of which you cannot imagine. Having a good one is a plus for you in many ways. With a good one, you can unlock car title loans, mortgages, insurances, and some credit cards at lower rates.
Some employers also use card scores to make their hiring decisions for advancement. So having a good score will impact your ability to earn throughout your career. In this guide, you will find the basics of understanding what a credit score is, what it is not, how to determine whether your credit score is good or bad and what you can do to improve yours.
What Is A Credit Score?
A credit score is a number that shows your likelihood of repaying debts. Creditors use credit scores to determine whether to loan to people and under what terms. Your union or bank, for example, will look at yours before they approve you for a mortgage. If approved, the rates you qualify for will be directly associated with your credit score. With a lower credit score, you will receive higher interest rates.
Notably, your ratings does not reflect how much you earn. People earning a small amount of money can still have a high rating, while top earners can have poor credit scores. Similarly, your ratings do not have any ties with a card company or a particular bank. Card and bank issuers only pull your credit scores when determining whether to lend you or not.
Calculating Your Score
To get your credit score, pay attention to several factors. The Fair Isaac Corporation (FICO), for example, calculates based on their internal algorithms. The credit scores are from data from the bureaus.
Factors like the length of the history, the amount you owe the creditor, and the payment history are in the credit score. However, FICO does not disclose the formulas it uses when calculating the same.
At What Frequency Do They Change?
Credit scores change constantly depending on your actions. It could vary after a day or after a month. All this depends on the information your creditors are giving. Your creditors constantly give information regarding your current financial obligations and your payment history to the credit bureaus.
The company then uses this information with other data about you to calculate yours. The credit score ‘grades’ you regarding how responsible you are financial. New creditors will use the grade to determine your likelihood of paying up in the future. If you grade higher, you have a higher chance of being approved for credit cards and loans at the best rates.
What Is A Good Score?
This question lacks a definite answer. The goodness or badness of your credit score depends on the type you are trying to request from and the highest interest that you are willing to pay.
Even with 640, you will be eligible for high-interest rates that will add a considerable number of bucks to your mortgage payment.
If you are really in the numbers, then below we’re point ranges that distinguish bad from good.
- 781 and above: Excellent
- 661-780: Good
- 601-660: Fair
- 501-600: Poor
- 500 and below: Bad
How To Find Yours
Most of the card companies will give you free FICO scores. If you come across the best ones, they will score you even if you are not their customer. Alternatively, you can purchase your FICO score from FICO’s website. Since some banks and cards do not offer monitoring services, be sure to check what type you are getting before paying for it.
The other easy way to get yours is by applying for a loan or card. In your denial or acceptance letter, you will receive your credit score.
How To Improve Your Credit Score?
If you realize yours is not where you want it to be, There are several things you can do over time.
- Paying bills in time is the best way you can build credit. Making your payments on time for six months is the best way to build credit.
- Reduce your Ratio of debt to income. If you have a higher debt to income ratio, your credit score will be lower. Start by paying off loans and credit cards to leave you with some breathing space.
- Get rid of errors from your credit report. Any credit reports that are not accurate will reduce your chances of being allowed for credit. That could include collection accounts, charge offs and late payments. Be sure to dispute any errors you find or hire a reputable credit repair specialist to help with the job.
The first step to financial freedom is understanding how to get a good rating. Always remember that it will take you some time to build a good rating. Also, you have the consumer rights to ensure that your ratings are always accurate. There are different ratings, and you can request yours from your bank or card company.
