What your credit score is, how to check it, what it means for you, what affects it, how to quickly rise it, and more
Keeping a good credit score can do you a lot of good. Aside from saving you money, time, and effort, a good score is like an open invitation to every existing benefit and advantage the financial institutions have to offer. Therefore, understanding the importance of your credit score should be your top priority. Nowadays, your credit score is arguably one of the essential elements of your financial health. It will determine your lifestyle choices, and it offers access to outstanding financial solutions that could take your well-being and welfare to a whole new level.
- What your credit score is, how to check it, what it means for you, what affects it, how to quickly rise it, and more
- How does the credit score work?
- How many different scoring models are there?
- What are the 4 best ways to check my credit score?
- What does a credit score mean?
- What are the 5 factors that affect my credit?
- What is the difference between Credit Report and Credit Score?
- What score do I need for a credit card?
- When is the right time to check my credit score?
- How can I quickly raise my score?
Knowing how a credit score works and what it means for you is vital to leading a life of prosperity. With the latest technological advancements all around you, checking your credit score is easier than ever. Before you apply for a mortgage, personal loan, or a new credit card, checking and knowing your score is a smart move. More importantly, knowing your score at all times gives insight into what interest rates to hope for and what range of financial products you’re eligible for. Doing a random credit score check won’t negatively affect your credit, nor will it impact your credit history in any way. You can do it for free, and it’s absolutely recommendable to do it from time to time, even if you don’t plan on applying for credit.
Many people aren’t aware of this but, random checking of your credit score can actually help improve your credit. It does so by allowing you to identify any potential errors or fraud on your report that may lead to a significant drop in your score. That’s why you should do regular checks to prevent any issues from escalating into something beyond repair. Your credit score is a 3-digit number, covering a range from 300 to 850, which is determined by analyzing your credit file.
In the financial world, this number is a form of your ID that tells all financial institutions, such as creditors, lenders, and credit card issuers, what type of a consumer you are, as well as your ability to pay your debts. It’s also a tool these institutions use to assess any potential risk that may come from allowing you to use their financial products. Your credit score depends on various factors, such as the length of credit history, payment history, the number of credit cards, your past and current accounts, etc. Depending on the model used, FICO or VantageScore, credit score ranges can vary.
There are three main credit bureaus, TransUnion, Equifax, and Experian. These agencies are the ones that pull the score. The score numbers reflect your credit ratings range from very poor to exceptional:
- Very poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
How many different scoring models are there?
Credit scores are divided into two main models: FICO and VantageScore. While the majority of US financial institutions prefer FICO, VantageScore is just as important. The models share some touching points:
- Scores range from 300-850
- Both use your payment history as a crucial determining factor of your score
They also share some differences that mostly apply to how these agencies rank and weigh other essential factors. However, the biggest difference is in the credit scoring model. It refers to the way both scores are calculated.
- Payment history (35%) – it shows your repaying habits and whether you’ve paid your dues on time.
- Amounts owed (30%) – also known as credit utilization rate, it’s the percentage of loans and credit you already used.
- Length of credit history (15%) – the period during which you’ve had credit.
- New credit (10%) – the frequency of opening and applying for new accounts.
- Credit mix (10%) – a range of credit products you use, including mortgage loans, finance company accounts, installment loans, credit cards, etc.
- Payment history – plays an extremely influential role in determining your score.
- Duration/type of credit – highly influential
- The percent of credit limit used – highly influential
- Total debt/balances – moderately influential
- Recent credit inquiries and behavior, and available credit – less influential
What are the 4 best ways to check my credit score?
Essentially, there are three ways to check your credit score:
- Pay a visit to a credit scoring website – there is a range of websites that offer insight into credit for free. However, keep an eye on the terms and conditions before you sign up. Some of these websites even add educational scores to the table to make sure you have a full understanding of your credit.
- Contact your lender or credit card issuer – many lenders and credit card issuers allow their consumers to ask for complimentary credit score reports. You can get your hands on yours easily by logging into your account online or providing a valid email address and receiving your monthly statement. The only requirement is to opt-in to receive the score.
- Check with a nonprofit credit counselor – one of the best ways to get some basic understanding of what is what in your credit score is by consulting a credit counselor. Aside from providing your scores for free, they can also lend you their expertise and go over the details.
- Get your score free of charge from each Credit Bureaus once a year by visiting AnnualCreditReport.com
What does a credit score mean?
With so many credit scoring models around, it’s hard to keep track of all that information. Most people have more than one score. However, it’s quite interesting that your credit score from one financial institution will likely differ from the one you get through another institution.
Suggested Reading: What Is a Credit Score?
It’s not the number of scores you have or the particular score that you should worry about. Instead, it’s the range you fall in that should be your primary concern. Most card issuers and websites make efforts to offer some details behind the score, in addition to the sheer number.
These details typically include your score rating and your financial standings. However, you can also find information about why your score range is so low or high. This range can help you realize a few crucial things, such as your eligibility for certain types of credit products and your creditworthiness.
What are the 5 factors that affect my credit?
One of the most important things about getting a bigger picture of how your credit score works and impacts your financial health is understanding the factors that affect your score. This understanding can help you take the necessary measures to improve these factors if your current financial situation calls for it.
We already mentioned the factors that determine your FICO score, but we’re going to go further down the rabbit hole so that you can understand how they’re all weighted differently. There are five main score-impacting factors to pay attention to:
- Payment history – your payment history tells all about the way you pay your bills, whether you’re paying on time or you’re due late, how regular you do it, etc. It accounts for 35% of your FICO score and is the biggest factor affecting your credit score. The best way to keep it as high as you can is to pay your dues on time. Any missed, or late payments reflect negatively on your score.
- Amount of debt – also called credit utilization ratio (CUR); this is the total amount of your debt that’s currently in use. This ratio makes for 30% of your score. It’s most recommended that you keep your CUR below 30%.
- Duration of credit history – lenders address this factor to see the period in which you’ve been using credit, as well as how old your open accounts are. It accounts for 15% of your score. The longer the credit history, the higher the score.
- Amount of new credit – accounting for 10% of your score, this factor refers to the total amount of new credit accounts. It also includes the number of hard inquiries and new accounts you’ve opened recently. If this number is really high, lenders see you as a greater credit risk.
- Credit mix – accounting for 10% of your score, this factor refers to what types of credit you have. If you have installment loans and credit cards, your score is higher than it would be if you only had one credit type.
Your credit report and credit score are two completely different things.
A report includes details about your current credit and financial situation, credit activity, and overall financial health. It’s a holistic interpretation of the state your credit is in. Credit reports contain all your credit inquiries, credit accounts, and personal information.
A credit score is only numerical proof of your real financial health. Creditors and lenders address both your report and score when assessing any potential risk of lending you their financial products. A report tells them all about your financial past, spending habits, and how responsible you are with money and paying back your debts. A score is just proof that you’re financially healthy at the moment. However, don’t let this prevent you from working on your credit score, as a high score always looks great on your credit report. The higher the score, the healthier the report.
What score do I need for a credit card?
Most people wonder just how their credit score impacts their eligibility for credit cards, so we decided to shed some light on the subject. If your score is really high, 750+ (Excellent Credit), you can easily qualify for more than just one credit card.
The higher the score, the higher the number of cards and you get much better interest rates. High and excellent credit scores make you eligible for premium credit cards. This category of premium cards includes a range of travel rewards cards that offer an array of great benefits, advantages, rewards, and more. In case your credit is poor, and you’re looking to rebuild it, or you’re simply new to credit, an excellent recommendation is to qualify for a secured card.
When it comes to when to check your score, the time is always right but, it actually comes down to your comfort level. Some people do it annually, while others prefer to do it weekly or monthly. Since these random checks don’t impact your score, regardless of how frequently you do it, any time is the right time. We recommend that you do it as many times as needed, as this is the best way to get in control of your financial situation and fully understand all driving factors that affect and impact your score.
This type of financial progress is an excellent way to learn how to improve your score. However, day-to-day changes shouldn’t be your focus. Instead, you should pay attention to trend patterns. We’re going to mention some situations when you should check your score before you act:
- When you plan on applying for a new card
- Before you apply for a loan
- Before applying for a mortgage
- When you’re searching for a new job
- When you want to protect yourself against identity theft
How can I quickly raise my score?
Now that you know basic things about your score and how to check it let’s go one step further and share some knowledge on things you can do to improve your financial situation. Here are a few good tips that should set you on the right track. (More: Fixing, Pumping and Protecting Credit)
1. Make Your Payments on Time
How responsible you are with your payments and how reliably you pay your bills is consequential to your credit score. It’s something that all creditors and lenders will first look into before they decide to approve your request for a credit card, a loan, and so on. Past payment performance and responsible financial behavior are two driving factors of your risk assessment. So, pay your bills on time, make payments as agreed and make sure you aren’t behind any payments. It’s one of the best ways to improve your score.
2. Keep a Low Balance on Your Revolving and Credit Cards and Pay off Debt
Nothing helps you improve your score like a good credit utilization ratio. CUR tells creditors that you’re financially capable of handling all your obligations without any problems. To improve your CUR, you can do the following:
- Pay off your card debt
- Keep your credit card balances as low as possible
- Consider becoming an authorized user on someone else’s account
We sincerely hope that this article will help you get a hold of your financial situation and end up with the highest score possible. Even though some of the details may sound robust, it’s all simple math in the end. Simply pay attention to all the driving factors that have the power to increase or decrease credit score, and you’ll be fine. To conclude, checking your score is a healthy habit that can help you get a more profound understanding of your credit, scores, reports, and financial situation. Check your score as many times as you want, as this is the best way to make sure there are no errors or discrepancies with the numbers.