A credit score is a prediction of your creditworthiness that is assessed against quite a few different factors. This includes how likely you are to pay a loan or debt back on time, all based on the information that you provide in your credit reports.
When it comes to applying for credit, your credit score is crucial. Lenders will use this score to make decisions about whether you can take out a loan, credit card, mortgage, or other credit-based products. It also determines the credit limit you receive.
Yet there’s a lot more to a credit score than just these factors. If you want to know more, read on for a quick guide to credit scores.
First, What Is A Credit Score?
This is a three-digit number between 300 and 850 that is based on your credit history. It tells prospective lenders all about how good you are with your money (your creditworthiness) and shows how much of a risk it would be for them to lend money to you. The number will go up and down depending on multiple factors.
What Is A Good Credit Score?
Poor credit scores hover around the 300 mark, whereas 850 is the mark of an exceptional credit score. The range of credit scores varies based on the credit scoring model that is used and also the credit bureau that pulls the score.
If your credit is 690 or above, it is considered a good credit score. Although your score is already good, you may want to consider applying for a credit card for 690 credit score to bump it up that little bit more. This will also help you to build a stronger credit history.
Why You Should Aim For A Higher Credit Score
A higher credit score means that lenders will view you as being at a much lower risk of not paying your borrowed money back. If you’re planning to apply for a mortgage, a loan, or a new credit card, having a better credit score will help you out.
Ensuring you have an exceptional credit score means you are far more likely to be accepted by a lender and may result in you being offered much better rates. It will also help lenders to verify the following things:
- Whether they’ll give you credit or not
- How much your credit limit will be
- The interest rate to charge you
Yet the higher your credit score is, the better your chances will be of getting accepted for credit.
How Is It Calculated?
When you apply for credit, a lender will look at the information provided on your credit report and application form, in addition to any other relevant information. When it is combined, this data will be used by the lender to calculate your overall credit score.
This will differ depending on the type of lender that you go with, as they will all have different ways of assessing and then calculating your credit score according to the set criteria. This will typically include the following components:
- Payment history: this shows how well you can pay your bills on time. It also checks for bankruptcies and whether you’ve been sent to collections.
- Length of your credit history: someone with a long history of on-time payments is more reliable than someone with no credit history or short-term credit history.
- Numerous new credit accounts: if you often apply for different types of credit, it’s a significant indicator that you’re under financial stress. Be very careful when you apply for credit.
- The total amount owed: this concerns your debt-to-income ratio or the amount of debt you have versus your ability to accurately pay your bills.
How To Check Your Credit Score
If you’re planning on applying for credit, it’s a good idea to check your credit details. There are many credit card lenders out there that will allow you to check your credit score for free. They may even recommend that you do so at least once a year to make sure your report is error-free.
Keeping Your Credit Score Healthy
There are numerous ways to keep your credit score healthy and at a score that you are happy with. Some of our top tips include:
- Pay bills on time. This includes utility and household bills in addition to credit card repayments.
- Pay more than the minimum if you have a lot of outstanding debt. This will look favorable on your credit history report.
- Only borrow what you can afford otherwise, you may wind up in a worse financial situation.
- Manage your accounts well and reduce your credit card balance when you can.
- Apply with caution, as hard searches can negatively affect your credit score.
- Keep your credit utilization low. This is the overall percentage of the credit limit that you use.
Other Things To Remember
You can have a low income and still have a higher credit score. This is because your credit score isn’t based solely on your wealth or the size of your income but is instead based on the way that you use your credit card.
You also must remember that simply having a credit card is not enough to improve your credit score. Instead, you must learn to stay on top of repayments and manage your card.
Building your credit score from scratch will likely take some time, but it doesn’t need to be an impossible battle. Provided you make monthly repayments on time and use your card responsibly to pay off the money you can afford, you’ll be building your credit in no time.
That concludes this quick guide to credit scores. Hopefully, you now know more about what a credit score is, how it works, and how it is calculated.
Remember, it is never too soon to start building your credit. In fact, the sooner you start, the better your credit score will look in the long run. This will also help you learn to maintain your higher credit score for longer periods.