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Have you ever wondered what is a credit score?
This three-digit number plays a crucial role in defining your financial credibility, impacting everything from loan approvals to the interest rates you receive.
Understanding how it works is essential for securing better financial opportunities.
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What is a credit score?
A credit score is a 3-digit number lying between 300-850, that decides your creditworthiness.
If you have a credit score of 700 or higher, it is considered to be good. If you have a credit score of 800 or above, then it is excellent.
The average FICO score was noticed at 715 in the US in 2023 surveys. Having a good credit score enhances your credibility for loans and better rates.
If you want to apply for a credit card or get your loan approved for lower interest and better terms and conditions, then it is important to maintain a healthy credit score.
A credit score is basically your report card that keeps a record of how good you are at repaying your loans.
It is based on your credit history, your total number of accounts, debts you have taken, history of repayment, and some more factors.
Different lenders have different criteria for lending loans, as to whom to give loans on what terms and interest rates.
How does it work?
Everyone has dreams, and every dream is associated with money. If you want to buy a car, a house, or a good education plan for your kid, everything requires you to be financially stable or able to handle the expenses.
Now it is difficult for most US citizens to pay for a house, a car, or a demanding college degree.
Here come the loan lenders, who offer you credit to fulfill all your needs at certain interest rates and specific terms and conditions.
But it works only if you are eligible, so, you need to have a good credit score.
A credit score plays a significant role in your financial life, as it helps lenders decide whether to offer you credit or not.
Once you submit the loan application, lenders will check your creditworthiness, and if you have a healthy credit score, then they will approve your applications as well there are good chances that you will get your loan with lower interest and better rates.
On the other hand, if your credit score is lower, then your application will be declined.
How your credit score is calculated?
Calculating credit scores may have different criteria at different companies.
Three different yet renowned credit reporting agencies in the US report, update, and store consumers’ credit histories.
While information collection may differ, five main factors are considered for calculating credit score:
- History of previous payments (35%): Your payment history shows how you are with your bill payments. How many late payments have you made? Do you pay your bills on time or not?
- Amounts owed (35%): The amount owed calculates the credit you have used and the credit you still have. It is also referred to as credit utilization.
- Length of your credit history (15%): If your credit history is longer, it is easier to calculate payment history due to a lot of data and it is less risky.
- Credit types you are using (10%): You may be using different types of credit, such as mortgage credit, car loans, or credit cards. It depends on how you handle the credit mix.
- New credit (10%): Lenders will also look at the new credits you have been applying for. It looks bad on your credit history if you have submitted multiple applications for new credit recently.
What factors impact my credit score?
Here’s a fact you should know about; you don’t have a fixed/ single credit score.
Each credit score is calculated differently, depending on the type of loan, the time it’s calculated, and the source of data.
But you should also know that the higher the credit score, the higher the chances for getting better interest rates and better terms.
Now let’s look at the factors that usually impact your credit score:
- History of your bill payments
- New credit applications
- Total number of loan types and accounts you have
- How long has it been since you opened your loan accounts
- How much of your credit is available that you are using
How Do I Get a Credit Score?
A credit score is really important. If you want to build a good credit score in the USA, then there are a few key factors to look at:
Open a credit account
Apply for a credit card if you have no previous credit history. Or you can apply for a retail store card or student credit card.
You can also become an authorized user on your spouse or parent’s credit card if you don’t have your own. It is important to build a history.
Be careful with credit
It is important to manage the spending. Use your credit card for manageable spending such as groceries or gas, which can be paid every month easily. It is recommended to use less than 30% of your available limit.
No late bills
Pay your bills on time. It plays an important role in building a good credit history. Late payments can cause a dip in your credit score if notified to credit bureaus.
Track your credit reports
Every year, visit the Annual Credit Report to obtain a free credit report from each of the three main credit bureaus: Experian, Equifax, and TransUnion. Check your report for accuracy so you can challenge mistakes if there are any.
Diversify your credit
Try to use a credit mix at times. For example; using revolving credit like credit card or installment loans like car loans or student loans.
Avoid multiple credit applications.
Too many credit applications can make you suspicious and can hurt your credit score.
Keep your credit account open
Keep your old accounts open, even if you don’t use them. It helps build a lengthy credit history, which makes it easier to build a good credit score.
How Can I Raise My Credit Score Quickly?
You can sign up for a service that provides additional payment data, such as your rent and utility bills, etc.
They are not usually included in your credit score, so if you want to improve your credit score quickly, this is how you can do it.
Another thing you should know is to make payments on time. If you have a good history of making timely payments, you might be able to quickly improve your credit score by signing up for a program like Experian Boost.
Tips To Keep Your Credit Score Healthy:
Maintaining a healthy credit score is essential if you are looking for better financial opportunities. Here are a few tips on how to keep your credit score healthy:
- Make sure to pay all your bills on time, and automate bill payments if needed.
- Try to keep your credit utilization under 30% of the available credit limit.
- Keep your old accounts open to maintain a lengthy credit history.
- Keep track of your annual credit report at Annual Credit Report.
- Use your credit card responsibly and pay the balance monthly, don’t let it stack up.
- You can become an authorized user on the account of someone you trust. This way you can benefit from their good payment history.
It is crucial to build a good credit score in the USA as it can significantly impact your financial life.
Building a good credit score opens new opportunities for you. Building a good credit score allows you to borrow loans at better prices and lower interest.
It can also assist you in other ways that help save money in the long run. So, start building a good credit history if you don’t have any.
