Your credit score is a “grade” of your credit behavior calculated by agencies like Experian, Equifax, and TransUnion based on information in your credit report. Credit scores are frequently referred to as FICO scores, a name derived from Fair Isaac Corporation, the company that invented credit scores.
Credit scores typically range from 300 to 850 — the higher the better. Your credit score is used by potential lenders to judge your reliability and risk when you apply for a loan. That means it’s a key factor in determining whether you’ll be approved for a loan and the terms of the loan when it is issued.
The pros to having a good credit score
A good credit score can mean lower interest rates. It shows you have a responsible credit history and that you are a low-risk borrower who is more likely to pay back your loans. So when you apply for a car loan or a mortgage, a lower interest rate could save you hundreds, if not thousands, of dollars in interest costs.
A good credit score also allows you to be more selective when choosing your lender. The better your score, the more leverage you may have in getting good terms on your loans when you shop around for the best deal.
The cons to having a poor credit score
Lenders use your credit score to judge how likely you are to repay a loan. A poor credit score may mean your loan application is declined. But that's just the start.
Your credit score is not only checked by lenders, but also by other parties when you make other financial arrangements, such as renting an apartment or signing up for utilities. In cities where rental companies can be selective about tenants, a bad credit history can make you an unappealing candidate. Bad credit can result in a denial for basic services, such as electricity or a cell phone, if your credit report shows that you tend to pay late.
A poor credit score can even cost you a job! Prospective employers may check your credit rating to judge your degree of responsibility.
Many lenders charge different interest rates, depending on the applicant’s credit score. So even though you might get approved with a so-so credit score, you may pay a higher interest rate than you would have if you had attained a better credit score.
What about having no credit history?
Sometimes having no credit can be just as much of a problem as having bad credit.
If you have no credit history, lenders have no record to assess your financial behavior. In this case, you need to establish some form of credit and use it responsibly to build up your credit rating.
Ways to improve your credit score
Your score is continually changing, depending on how well you manage your credit. These are some ways to build and maintain a high credit score:
- Pay your bills on time.
- Apply for credit only when necessary. Opening too many credit cards in a short time can be harmful to your credit score.
- The longer your credit history, the better. Canceling an old credit card could hurt your credit score, because it may shorten the length of your credit history.
- Keep credit card balances to less than 50% of the available credit limit on the credit card.
- Make more than the minimum payment on credit cards.
- Have a mix of credit account types, such as revolving (varied monthly payments, such as credit cards) and installment (regular monthly payments, like you make on a student loan or a car loan).
- Check for errors on your credit report periodically to ensure you have not become the victim of identity theft.
For more information about building and maintaining a high credit score visit MyFICO.com.
Ways to hurt your credit score
There are also some behaviors that will bring down your score:
- Exceeding your credit limit on your credit cards.
- Opening and closing too many credit accounts in a short period.
- Making payments past the due date or, even worse, defaulting on a loan.
- Writing bad checks.
- Declaring bankruptcy.
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