Understanding Your Credit Score
Your credit score is a crucial factor that lenders, credit card companies, and other financial institutions use to evaluate your creditworthiness. A high credit score can make securing loans, credit cards, and other financial products easier at lower interest rates. All these numbers can be confusing; let us explain how credit scores are calculated and how you can improve them.
What is a credit score? A credit score is a three-digit number that represents your creditworthiness. It is calculated based on your credit history, including your payment history, credit utilization, length of credit history, and types of credit accounts you have. The most used credit scoring model is the FICO score, which ranges from 300 to 850.
How is a credit score calculated? Your credit score is calculated based on five factors:
- Payment history (35%): This factor determines whether you have paid your bills on time and have any late payments or collections.
- Credit utilization (30%): This factor determines how much of your available credit you use. Ideally, keeping your credit utilization below 30% of your available credit would be best.
- Length of credit history (15%): This factor examines how long your credit accounts have been open. Generally, the longer your credit history, the better your credit score.
- Types of credit accounts (10%): This factor looks at the different types of credit accounts you have, such as credit cards, loans, and mortgages.
- New credit (10%): This factor looks at how many new credit accounts you have opened.
How can you improve your credit score? Improving your credit score takes time and effort, but it is achievable. Here are some tips to help you improve your credit score:
- Pay your bills on time: Payment history is the most important factor in your credit score, so make sure you pay your bills on time.
- Reduce your credit utilization: Keeping your credit utilization below 30% of your available credit can help improve your credit score.
- Check your credit report for errors: Errors on your credit report can negatively impact your credit score, so check your report regularly and dispute any errors you find. Our My Credit Manager tool allows you to manage and monitor your credit report.
- Keep old accounts open: The length of your credit history is an important factor in your credit score, so try to keep your oldest accounts open.
Don’t apply for too much new credit at once: Applying for too many new credit accounts at once can negatively impact your credit score, so try to limit your credit applications
In conclusion, understanding credit scores and how to improve them is essential for managing your finances and achieving your financial goals. Following the tips above, you can improve your credit score and access better financial products at lower interest rates.