A credit score is a number that instantly lets a creditor know about your creditworthiness. In fact, this number alone is enough for most banks and lenders to decide if they should give you a credit card, loan, etc.
While there are several different scoring models used to calculate a credit score, the one used most often is the FICO score. This is 3-digit number which will affect your life in ways you can’t imagine, if you live in the US. So it’s imperative you get a good score.
Credit scores at a glance
The credit score ranges below will tell you where you stand.
- 300 – 629 (Bad)
- 630 – 689 (Fair)
- 690 – 719 (Good)
- 720 – 850 (Excellent)
Ideally, you’ll want to be in the 700+ range and above.
Improving your credit score
To improve your credit score, you need to know what it’s impacted by. 3 factors play a major role here your available credit, your payment history and your credit utilization rate.
In order to have a credit score, you must first get credit. That will mean opening accounts by applying for credit cards, etc.
You could even ask your parents to add you as an authorized user on their credit cards. As long as they pay their bills responsibly, your credit will improve too. When it comes to payment history, you MUST pay your bills on time, preferably in full.
As for your credit utilization try not to use more than 30% of your total credit. There’s a fine balance here.
You’ll need to use your credit to show that you’re financially ‘secure’, but you shouldn’t use too much of it… because you’re financially ‘secure’.
And you must pay your bills on time, because you’re trustworthy and paying in full is even better, because… well, you’re financially secure. Yes, it’s a convoluted system, but there is method in this madness, and it all goes towards showing your creditworthiness.
Here are a few quick pointers to improving your credit score:
- Do NOT miss payments
- Pay off all credit card balances every month
- Don’t utilize more than 30% of your total credit
- Dispute incorrect information on your credit report
- Do NOT close accounts in good standing (especially if they’ve been open for quite some time)
- Do not apply for multiple credit cards during a short period of time
- Limit the number of ‘hard enquiries’ on your credit report
Let’s assume you’re taking a car loan or a home loan. The creditor you approach will call up your credit report. This creates a ‘hard inquiry’ on your account. Ideally, you want to limit the hard enquiries on your account to a short time frame.
So if you’re making big purchases that will require loans, do it all within a 2-week time frame so that your hard enquiries are only for a short while.
Generally, you will improve your credit score over time once you fix what’s lowering your score. Get your free credit report from https://www.annualcreditreport.com/ and take note of your score.
You may wish to speak to a financial advisor if you can’t figure out why your score is low. That said, if you follow the pointers above, in most cases, you’ll see your score improve.