Whether you plan to make a big purchase or take out a loan in the future, now is the time to think about it and understand your credit scores. Many people, especially those who have had little need for loans, may not think about their credit score and don’t realize they should be considering it until the time comes when they need access to good credit.
This is the time to think about your credit score, as you can make positive lifestyle choices and raise your score to prepare for a loan.
Why is a good credit score important?
A credit score is a number used by lenders to determine a person’s creditworthiness. A person with an excellent credit score can receive loans, such as a car loan, at better interest rates than someone with a lower credit score. Other factors also affect the rate, including the type of collateral you use to secure your loan and the loan-to-appraised value ratio determined on your application. Having a lower interest rate means you pay less over the life of the loan. In addition, a person with a low or no credit score may be denied a loan because they have no or low credit score.
Credit scores are also used in other ways. Some property managers and landlords conduct credit checks on applicants to determine if it’s worth renting an apartment or house to them, because the score tells them how likely tenants are to make payments on time. People with poor credit scores may also have to pay higher security deposits to rent houses, and this works as an incentive to make payments on time.
Utility companies can check the credit scores of new customers; if they detect a poor payment history, they can also request that the customer pay a higher deposit. While employees cannot access your credit score, they can request access to your credit report to see if it contains negative scores.
Newcomers to the workforce and those who need to rent an apartment or buy a car for the first time may want to make sure their credit score is the best it can be.
What is a good credit score?
There is no magic number for a good credit score. Generally speaking, to get the best interest rates, people should have a score of more than 750; a rating between 700 and 749 is also considered good. Acceptable credit generally ranges from a score of 650 to 659. Applicants for credit or loans with “poor” credit scores may not receive credit authorization based on their scores alone.
What affects your credit score?
While each of the three major national credit reporting agencies has its own algorithm for determining credit scores, they all use much the same data, including:
- On-time payment history
- Percentage of available credit used
- Number of credit sources with balances
- Credit History Time Period
- Types of credit used (including renewal, mortgage, consumer financing, and installments)
- Number of inquiries per credit
Each of the six factors above impacts your credit score differently. While your payment history accounts for 35% of your FICO Score, the length of your credit history only affects 15% of your score. Your credit utilization is 30% of your score, and the combination of credits and the age of your credit accounts are each 10%.
When it comes to raising your score, these factors will tell you where to start to see improvement. If possible, start working on improving the factors that carry the most weight. If you’ve skipped credit card or loan payments, for example, starting to pay them on time on a regular basis can improve your score.
It’s important for newcomers to the credit scene to understand how it works and why it’s important to get a good credit score. Taking your credit score seriously can save you money, both in the short and long term.