Your credit score is important because it provides a picture of your past payment history, which can be used to determine your future payment behavior. You already know that banks, credit unions, mortgage, and credit card companies all look at your credit report and score to help determine if you are a good lending risk.
Generally, if your score is high, your risk is low and if your score is low, your risk is high and lenders may question your ability to repay the loan. In addition, with higher risk comes a higher interest rate to borrow, which over time, can become a huge financial factor.
But a lot of other companies can also use your credit score to determine if you are a good risk.
- When you apply to rent an apartment or home, the property management company will check your credit before you sign a lease. They want to see that you’ve paid your bills on time because that’s a good sign that you will pay your rent on time.
- Insurance companies in most states will use your credit score to estimate how likely they think it is that you will file a claim on your insurance policy. If you have a good credit score, you will typically pay less for your insurance.
- Employers can also pull a report from the credit bureau. This report doesn’t include your score but it helps them determine your potential longevity as an employee.
- Utility companies will check your credit before providing service to you. If you have poor or no credit history, you may have to put down a deposit before getting your utilities connected.
What’s a Good Credit Score?
Your FICO Score ranges from 300 to 850. Generally, a credit score of 700 or above is considered good. A score of 800 or above is considered excellent. Most credit scores fall between 600 and 750. Again, a good credit score is essential to your financial future because the higher the score, the less credit risk you pose.
Improving Your Score
There are different factors that go into your credit score calculation. The formula is complicated but the basic factors that impact your score are:
- Your payment history & number of late payments made.
- Your capacity or credit utilization rate. This is how much you owe in relation to your available credit limits. A low credit utilization rate shows you’re using less of your available credit and this an indication you’re not overspending.
- The age of the credit accounts you have.
- The total amount of your debt.
- The types of accounts you have and mix such as installment vs revolving credit.
- Any public records such as bankruptcy.
- How many new credit accounts you’ve opened recently.
- And, the number of inquiries on your credit report.
If you want to improve your score, you have to understand and improve these factors. Some general tips to improve your score involve:
- Pay down credit card balances.
- Do not close credit cards because your capacity will decrease.
- Continue to make payments on time. Older late payments will become less important over time.
- Slow down on opening new accounts.
- Move revolving debt to installment debt where you have an end-date for paying it off.
You can request a free copy of your credit report annually from AnnualCreditReport.com. This free report will not include your credit score; however, you can pay a nominal fee to obtain your score. Monitoring your credit report not only helps you detect fraud early but can also help you identify and dispute any errors, as well as, see what areas may need improving.
If you have questions about your credit report, contact us. We would happy to review your report and help you understand all of the components.