Lenders and creditors utilize credit scores to evaluate your financial responsibility. Your credit score influences your eligibility for loans, the interest rates offered to you, and your capacity to lease or own assets such as vehicles and homes.
Comprehending your credit score streamlines your financial decision-making. Here’s what you should be aware of:
What is a Credit Score?
A credit score is a three-digit number designed to gauge your financial reliability. Typically ranging between 300 and 850, a higher score is more favorable.
Components of Your Credit Score
Your score is computed based on five factors, each contributing to a different percentage of your overall score:
Payment History: Lenders seek assurance that you’ve consistently paid your bills on time in the past – a fair expectation. If you’ve been punctual with payments, this aspect of your credit score will reflect positively. On the flip side, frequent missed payments can have a negative impact (but don’t worry, we’ll address this later!).
Amounts Owed: Carrying an outstanding balance is not inherently problematic. However, maxing out your available credit might suggest to lenders that you’re financially stretched.
Length of Credit History: Generally, a lengthier track record of effectively managing credit is viewed favorably. While not mandatory for a strong score, lenders appreciate seeing that you have accumulated experience in handling credit over time.
Credit Mix: While not compulsory, diversifying your lines of credit, such as having a mortgage, student loan, and car loan, can indicate to lenders that you can adeptly manage multiple credit lines.
New Credit: Any recent applications for credit accounts fall under this category. Applying for numerous new lines of credit in a short period may raise concerns for lenders, signaling potential financial challenges.
Why Credit Scores Exist
Consider this: Would you lend $1,000 to someone without any information about them? Probably not.
Lenders operate similarly. They require evidence of your financial responsibility before extending credit to you. However, a standardized system is needed for this evaluation. It wouldn’t be equitable for lenders to assess customers based on arbitrary criteria. Credit scores fulfill the role of providing a standardized and fair system for such assessments.
Why a Good Score is Essential
When a lender extends a loan to a customer, they are assuming a certain level of risk. There’s no assurance that they will receive their money back promptly. Therefore, they rely on your credit score as a tool for assessment and to tailor the offer they present to you.
If a lender reviews your credit score and finds it to be low, they are inclined to provide you with a less-than-optimal offer, such as a higher interest rate or less favorable terms. Conversely, if your score is high, you are more likely to receive favorable offers, such as a lower interest rate.
The same principle applies to car loans, student loans, and similar financial endeavors. A higher credit score increases the likelihood of securing favorable loan terms, ultimately saving you money in the long term.
How to Access Your Credit Score
You can retrieve your credit report from various sources, including credit card companies, banks, apps such as The True Finance apps, and credit monitoring services.
Step 1: Begin by logging into your credit card’s online portal. If available, use the search feature to locate your credit profile within the platform.
Step 2: If your credit card company doesn’t furnish your score, contact your bank or credit union, as many offer customers a complimentary credit score.
Step 3: In case neither of the above options provides a free credit score, consider downloading an app like True Finance, Credit Sesame, or Credit Karma. All three offer free credit scores accessible right from your mobile device.
Step 4: If you’re unable to access any of the aforementioned sources, you might consider purchasing your credit score from a credit monitoring service like MyFICO.
If your score falls below your desired range, there’s no need to panic—only about 21% of consumers boast a credit score in the Excellent range. Additionally, there’s a range of actions you can take to enhance your score.
How to Boost Your Score with No or Poor Credit
If you have no credit history, consider options such as opening a secured credit card, becoming an authorized user, or having your rental payments reported. For those with poor credit, it’s crucial to address the root causes before making any decisions.
If You Have No Credit…
If You Have Poor Credit…
Identify the root cause. Prior to making any financial decisions, acquire a copy of your credit report, which you are legally entitled to receive for free once a year from AnnualCreditReport.com.
Upon receiving your credit report, scrutinize it for potential errors such as:
If any discrepancies are found, promptly dispute the errors by contacting the credit bureau directly.
Address the underlying issues. If the information on your credit report is accurate, start addressing the aspects of your score that are subpar. For instance, if your score is adversely affected because:
Bottom Line
A poor credit score is not a permanent setback — there are ways to recover from it. Begin by comprehending how your score functions and identifying the reasons it falls short. Then, take proactive steps such as obtaining your credit report and addressing the root causes.
