Are you planning to borrow money in the future?
If you are, then you should make sure that you’ll be able to get a good credit score first.
It’s because your credit score would determine whether you’ll be approved or not by the financial institution that you’re going to borrow money from. Your credit score could also tell if you can get a high-interest rate or a low-interest rate.
So, what is a credit score then?
Well, a credit score is a three digit number that’s generated from all your credit reports. Most financial institutions in the United States use FICO scores in examining their clients.
According to FICO’s website (myfico.com), 90 of the top 100 largest U.S. financial institutions use the FICO score to make consumer credit decisions.
FICO scores range from 300 to 850, where a low score means you are a high risk and you may not get a favourable interest rate, while the higher the score you get, the better your chances of getting good interest rate.
Basically, it’s like in your exam score, the higher the score, the better your credit is.
If you would like to understand more about your credit score and how it is calculated by FICO, then you should read this page: About Fico Score
What makes up your credit score?
Payment History (35 percent) — Tells how often you pay your bills and if you missed any payments for the past years
Amount of Debt (30 percent) — How much debt you owe (You should aim to get this lower, if you want to get a good credit score)
Length of Credit History (15 percent) — How long has it been since you last opened your accounts and how long have those accounts been active
New Credit (10 percent) — How many recently opened accounts do you have and your most recent credit inquiries
Types of Credit Used (10 percent) — The different accounts that you have (Having different credit types like credit cards, loans, or open credit would have a positive effect on your score)
Please note that other lenders may use another way to calculate your score, so you may end up with a different credit score.
The good thing is that if you’re paying your bills on time, using your credit properly, and you don’t have that much debt, then you have nothing to worry about. They could calculate your score differently, but you could still get a high score.
How to get your credit score?
You can purchase your exact credit score from a score provider, like myFICO.com or one of the three credit reporting agencies (TransUnion, Equifax and Experian). If you would like to find out the range of where your credit score lies, then you could use FICO score estimator without paying anything.
Be wary of credit repair scams telling you that they could fix your credit score and get you a better score. Instead of falling to those, you should aim to fix your credit score yourself.
Here are some tips that could help you improve your credit score:
- Pay your bills on time
- Pay off your debts
- Pay more than the minimum amount required
- Don’t apply for several accounts in such a short time span, these could indicate that you are a high risk
- Get help from an advisor
Have you recently checked for your credit score? Did you get a good credit score?
Photo Credit: Alan Cleaver