How Important is your Credit Score?
You may have heard from family and friends that maintaining a good credit score is essential to achieve your financial goals. Do you know why?
Let’s explore the definition of a credit score, how a credit score impacts personal finances, as well as how to achieve a top credit score.
What is a Credit Score?
A credit score is a statistical number from 300-850, which is determined by several factors including, but not limited to, your payment history, credit utilization, length of credit history, variety of credit types, new credit application(s), etc.
- Payment History – Even one missed payment can harm your credit score. Lenders want to be sure that you can pay back the debt on time.
- Credit Utilization – Your credit utilization ratio is determined by dividing the total revolving credit you are using by the total of all your revolving credit limits. This calculation helps to determine how reliant you are on non-cash funds every month. It is essential not to use more than 30% of your available credit.
- Length of Credit History – This includes everything from the age of your oldest credit account to the age of your newest credit account, as well as the average age of your accounts. Generally speaking, the longer your credit history, the higher your credit score should be.
- Variety of Credit Types – A diverse mix of credit accounts (i.e., car loan, credit card, student loan, mortgage, etc.), including the type of account and how many of each type indicates to lenders how well you manage a wide range of credit products.
- New Credit Applications – The number of newly opened accounts, as well as credit inquiries made by lenders when you apply for credit.
If you’re unsure of your credit score, contact your bank, credit card issuer or one of the three major credit bureaus for assistance. “You’re entitled to a free credit report annually form Equifax, Experian and TransUnion”, according to NerdWallet (NerdWallet.com).
How Does a Credit Score Impact Your Finances?
Credit scores are used to determine everything from interest rates to insurance premiums, utility deposits, and even your ability to rent an apartment, purchase a home or buy a vehicle. The higher your credit score, the more likely you are to be approved for better loans and insurance rates, lower interest rates, reduced deposits, etc. Therefore, a good credit score could save you thousands of dollars throughout your lifetime.
Given that credit scores have become an integral part of our lives, it’s essential to keep track of your credit score and take steps to improve your credit score continually. It is also important to remember that you can build a high credit score regardless of age or income!
How Can You Improve Your Credit Score?
- Review your credit report and dispute any errors that have negatively impacted your credit score.
- Pay all bills on time and consider making payments more than once per month, known as micropayments. Doing so will positively impact your credit utilization score.
- Contact your credit card company and request a higher limit on any credit cards with balances. When your credit limit increases and the balance either stays the same or is lowered through timely payments, your overall credit utilization decreases.
- If possible, pay monthly credit card balances in full. Carrying debt from month to month will impact your credit score. If you must have a credit card balance (we all have from time to time), try and pay it down as fast as you can.
- Do not close credit accounts that you’re not actively using. According to experts at NerdWallet, “closing a credit card means you lose that card’s credit limit when your overall credit utilization is calculated, which can lead to a lower score. Keep the card open and use it occasionally so the issuer won’t close it” (NerdWallet.com).
Understanding your current credit score and taking even the smallest steps towards improvement, will enable you to achieve long-term financial goals, such as the purchase of a home!
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