The most important factor when applying for a loan, mortgage, or credit card is your credit score. It determines whether you will receive credit, how much money you will need to pay each month, and may even determine the interest rate of your loan.
Your credit score is determined by different scoring factors. Each one contributes a different amount to the score. Depending on your credit situation and history, your score may be high or low.
But, what is a credit score? Is it something you should pay attention to when seeking credit? Here are some key credit score facts that you need to know. Keep reading!
What Is a Credit Score?
A credit score is a numerical expression based on levels of analytics of a person’s credit files to represent the creditworthiness of an individual.
It is based on credit report information sourced from credit bureaus. Credit scores are used by lenders, including banks providing credit cards, personal loans, and car loans, to make lending decisions about whether to extend credit and at what terms.
Types of Credit Scores
There are different types of credit scores, and lenders may use any type of credit score they deem appropriate. The most popular credit scores are FICO scores, created by the Fair Isaac Corporation, and Vantage Score, created by the three major credit bureaus – Equifax, Experian, and Trans Union.
Credit scores range from 300 to 850, and the higher the score, the better. A score of 700 or above is generally considered good, while a score of 800 or above is considered excellent.
What Is the Difference Between a Good and Bad Credit Score?
There are a few key differences between a good and bad credit score. A good credit score is generally considered to be anything above 650, while a bad credit score is any score below 600. A good credit score means you’re a low-risk borrower, which means you’re more likely to be approved for loans and credit cards.
A bad credit score means you’re a high-risk borrower, which means you’re more likely to be denied. However, getting approved for loans and credit cards has now been easier these days.
How Is Your Credit Score Determined?
A credit score is determined by some factors, including your payment history, the amount of debt you have, the length of your credit history, and the type of credit you have. Payment history is the most important factor in determining your credit score, so it’s important to always make your payments on time.
The amount of debt you have is also a factor, so it’s important to keep your balances low. The length of your credit history is also a factor, so it’s important to start building your credit early. The type of credit you have is also a factor, so it’s important to have a mix of different types of credit.
What Are Some Ways to Improve Your Credit Score?
Here are a few ways to improve your credit score:
Pay Bills on Time
Late payments can have a major negative impact on your score. Keep balances low on credit cards and other revolving credit. High credit card balances can hurt your score, even if you pay your bill in full every month.
Open New Credit Accounts Only as Needed
Opening too many new accounts in a short period of time can lower your score. When it comes to credit, it is important to only apply for and open new credit accounts as needed. This will help you keep your credit use low, which is a major factor in your credit score.
Additionally, every time you apply for new credit, the inquiry will show up on your credit report and could lower your score. So, it is best to only apply for new credit when you need it.
Don’t Close Unused Credit Cards
Having a longer credit history can improve your score. When you close an unused credit card, you are reducing your credit score and credit history. This can make it difficult to get new credit in the future.
Additionally, closing an unused credit card can also lead to higher interest rates on your remaining cards. It is generally advisable to keep unused credit cards open.
If you have unused credit cards, it’s important not to close them. This is because closing unused credit cards can impact your credit score. When you close a credit card, it can hurt your credit use ratio, which is the amount of debt you have compared to the amount of credit you have available.
A high credit use ratio can hurt your credit score. So, if you have unused credit cards, it’s best to keep them open.
Keep Old Accounts Active
This will help show you’re a consistent borrower. Some people believe that it is a good idea to keep old accounts active by using them, even if they do not use them.
The thinking behind this is that it will keep the account active and prevent it from being closed due to inactivity. Additionally, it may also help to improve your credit score.
Yet, there are also some drawbacks to this approach. For example, if you do not use the account, you may forget about it and end up with late fees or other penalties. Additionally, if you do not use the account, it could end up hurting your credit score.
Improve Your Credit Score Today
It’s important to know what a credit score is, how it’s calculated, and what factors influence it. By understanding these things, you can take steps to improve your credit score.
And a good credit score can save you money on interest rates and help you qualify for better loans.
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