By When applying for a loan, renting an apartment or even getting a credit card, credit scores are always an important step in the process. If your credit score is too low, you might get denied on your loan application, and if it is high, you might be offered a lower interest rate, but what is a credit score, and how do you improve it?
What is credit?
Credit is your ability to borrow money and repay it back later. If you want to get a loan for your house, the bank wants to have confidence that you will be able to repay the loan in full plus interest in the timeframe they’ve set. Credit scores are a three-digit number that summarizes your credit report, an in-depth look at your loans, credit cards, payments, etc. You can get your credit report or score from Experian, TransUnion and Equifax. Credit scores are calculated based on different models like a FICO or VantageScore.
Why do I need a good credit score?
Having a good credit score means that there is more confidence in your ability to borrow money and pay it back; thus, banks and lenders are more likely to approve loan applications and give you better interest rates on credit cards or loans. If you have a good credit score you can buy a car with a loan now instead of having to save for years to pay in all cash. You can get better rates on insurance premiums and even secure an apartment with a smaller security deposit when you have a good score. It is one of the most important factors in having good financial health.
What is a good credit score?
There are a few different models that are used to calculate scores, but they are all generally based on the same principle that a higher score means a better credit history, and a lower score is an indicator of bad or insufficient credit history.
The FICO Score is the most common model used by 90% of lenders. Its score range is from 300-850. A score of about 670 is considered good, and anything over 800 is exceptional. People starting out working on their credit score should aim to be in the good category.
Below is a graph showing what scores fall in each category.
How do I find my credit score?
The FTC suggests requesting a free annual credit from all three bureaus (Experian, Transunion and Equifax) on annualcreditreport.com because the three bureaus may have differences between their reports.
How do I improve my score?
Your credit score is based on your credit history, which looks at your past transactions, number of accounts, etc. Multiple ways to build your credit history and strengthen your score exist. Becoming an authorized user on a family member’s credit account, getting your rent payments reported on your credit report and having cosigners open accounts or get loans with you are all ways to help build your credit. Many financial institutions offer credit cards and will even have specialized student credit card programs. Just having a card in your possession won’t improve your score much, but not using too much of your limit and paying your bills on time will help push your credit score higher.
Having a good credit score can open many financial doors for you and makes financing big purchases less stressful. Financial institutions like Southland Credit Union offer opportunities to learn more about and improve your financial health with the guidance of finance professionals. To learn more go to https://www.southlandcu.org/ for further information.
