Credit Score Basics
How important is your credit score (also known as FICO score)? Is this something that you need to pay attention to?
Once you know your credit score, as well as how it can impact you, there is a good chance you will put more time and effort into improving this number.
Despite the importance of a high credit score, many people have no idea how it is calculated, what it means to them, and the steps they can take to improve their score. Here are some questions you need to answer:
What is a Credit Score?
Your credit score can be found on your credit report. Obtaining this is as simple as contacting one or more of the three reporting agencies: TransUnion, EquiFax, and Experian.
Did you know your score can differ from one agency to the next? For this reason, you should request your credit report from all three.
Note: you can get a free copy of your credit report from all three bureaus once a year. Getting started is as simple as visiting AnnualCreditReport.com. While your credit report is free, you may be charged a small fee for access to your score.
What is a Good Score?
Everybody has a credit score, typically ranging from 300 to 850. Here is a breakdown of what each score means:
- Less than 500: miserable credit.
- 500 – 579: bad credit.
- 580 – 619: poor credit.
- 620 – 679: average credit.
- 680 – 719: good credit.
- 720 and higher: excellent credit
What will Affect your Credit Score?
Now that you realize the importance of pushing your credit score as close to 850 as possible, you should focus on what you should and should not be doing in terms of your money.
Here are the details that affect your score:
- 35 percent of your score is based on your payment history
- 30 percent of your score is based on the ratio of debt to total available credit
- 15 percent of your score is based on the length of your credit history
- 10 percent is based on the types of credit you have, such as student loans, credit cards, car payments, and mortgage loan
- 10 percent is based on recent searches for credit
What can be done to Improve your Credit Score?
Those who are interested in improving their credit score can take several steps. While you may not see results right away, here are a few things you can do to improve your situation:
- Never miss a payment
- Do not carry high credit card balances
- Dispute inaccurate information on your credit report
- Reduce the amount of debt you owe
Why do you need a Good Credit Score?
There are many benefits of having an above average credit score, including but not limited to the following:
- Ability to secure a loan to buy a home or car. Furthermore, the better your score the lower your rate of interest.
- Obtain more affordable insurance, such as for your car and home
- Allows you to qualify for a small business loan
These credit score basics should help you better understand how this number can impact your life, both positively and negatively. If nothing else, remember this: the higher your credit score the better off you will be when it comes to your finances.
Chris Fuller went to the University of South Florida and has worked in the financial sector for over 20 years. He has extensive experience in all aspects of personal and small business lending, from personal loans, equipment finance to cash flow based solutions for small mom and pop businesses, and large corporations.