When navigating through life, a good credit score can make everything easier. Not only can it help you qualify for credit cards, auto loans, and mortgages, but it can also help you secure a better interest rate once you are approved. Additionally, a high score can demonstrate your trustworthiness to a future employer, landlord, or utility company.
Because your credit score can impact so many areas of your life, it’s wise to build and maintain a sold rating as soon as possible. This article will cover everything you need to know to achieve a great score, including how your score is calculated, what score you need, and how you can improve it.
How Is Credit Calculated?
When calculating your credit rating, scoring companies use information about your prior behavior to determine the potential risk lenders will face if they extend credit to you. While scoring formulas vary from company to company, important measures include:
- Do you pay your bills on time?
- What is your total debt?
- How many years have you had an open credit account, and what is your total credit limit?
- What is the ratio of your total debt to total credit?
Each measure helps determine whether you are creditworthy and can be trusted to repay a loan on time.
What Is Your Current Score?
Your first step towards a good rating is simply knowing where you stand. Luckily, applying for a free credit score report is quick and easy. By checking your credit regularly, you can keep track of how you’re doing, gain helpful insights, and identify potential problems early. For example, if your report contains a factual error that lowers your score, you want to know that as soon as possible so you can quickly resolve it.
What Should Your Goal Be?
Your credit score rating is expressed as a number between 300 and 850. The higher the number is, the better. However, it’s important to remember that even if your score is lower than you’d like, your credit rating is a moving scale that adjusts over time and, thus, can be improved with effort.
Having a score over 800 is considered “excellent” and can open many doors for you, including higher loan amounts and lower interest rates. If your score isn’t over 800, don’t despair. A rating from 740 to 799 is classified as “very good,” while 670 to 739 is still considered “good.” The next level down on the scale is 580 to 669, and while this rating is technically classified as “fair,” it’s not ideal if you hope to qualify for large loans or competitive interest rates. Under 580 is termed as “poor” and, therefore, requires your immediate attention and effort.
How Can You Improve Your Rating?
If you check your score and find that it isn’t as high as you had hoped, you can try to increase your score by improving any of the factors used to determine your rating. For example, since total debt is taken into account, it’s important to pay off as much of your debt as possible. Focus first on paying off high-interest credit card balances because this debt is the most expensive to carry forward.
Similarly, increasing your total line of credit can improve your debt to credit ratio, and in turn, your credit score. This is often as simple as asking your credit card company for an increase in your credit limit.
Paying your bills on time also carries weight in the rating system. Automate the bill-paying process by using autopay options, or set reminders on your computer to ensure that you are never late with payments.
By understanding what a credit score is and how it’s calculated, you can start improving your rating today. Periodically check your rating and take steps to improve your score, and before long, you will be on the path to achieving your goals.