No, we are not talking about the score of your favourite sportsman, we are talking about your credit score.
As you get into adulthood and start managing your own finances, it becomes imperative to learn the concept of credit scores.
As y’all know, we aim to provide you with solutions for all your financial queries, and this blog is no different. In this blog, we’re going to tell you everything you need to know about credit scores.
After reading this, you’ll be able to understand the following things:
- What is a credit score and how is it calculated?
- What can you do to build a good credit score?
- Why is having a good credit score important and what are some of the common myths around it?
So, let’s get started
What Is A Credit Score?
To put it in one line, the credit score is a numeric measurement of your creditworthiness. It helps lenders decide if they should give you a loan or a credit card. When it comes to the USA, the most common type of credit score is the Fair Isaac Corporation credit score.
Now, how do you calculate this credit score?
There are 5 factors that determine your credit score in different proportions. Let’s take a brief look at each one of them.
Factors That Determine Your Credit Score
Payment history makes up for 35% of your credit score. What does it do? It basically allows lenders to know whether you pay off your bills on time or not.
It makes up for 30% of your total FICO score. Credit utilisation basically measures the proportion of credit you’re using out of your total available credit.
Length of Credit History
Making up for 15% of your total score, the length of credit history refers to how long you’ve been taking credit. The longer your history, the better it is.
Credit mix comprises 10% of your score. It basically refers to having a mix of different types of credit accounts and loans you have. The more the merrier.
Finally, new credit makes up for 10% of your score. It is an account of how many new credit accounts you have opened and how many credit inquiries have been made to your credit report.
How To Build Your Credit Score?
Now that you know exactly what a credit score is, let’s come down to the really important question. How can you go about building an impressive credit score for yourself?
It’s no rocket science. It’s just about sticking to some consistent and financially viable habits. Follow these, and you shall have an above-average credit score to show for yourself.
Stay On Top Of Your Bills
The first point is as simple as it gets, just pay your bills on time. It allows lenders to know that you are someone who’s in control of their regular finances.
Keep Your Credit Balances Low
Here’s an analogy for you. Think of your credit limit as a bucket of water, you would never want to spill it all over the place. As a benchmark, ensure that you keep your credit balances at 30% or less and you’ll be good to go.
Diversify Your Credit Mix
What do we mean by this? We mean that taking different types of credits can help you improve your credit score. Get a student loan, or a credit card and even pay rent if you can on time.
Check Your Credit Score Regularly
This point is purely based on constantly checking where you stand with your credit score. Checking it regularly will help you know if you’re heading in the right direction with your finances or not.
The Importance Of Building A Good Credit Score
Alright, now we know what is a credit score and what all do we need to do to improve it. But, what will a good credit score do for you? What’s the importance of having an impressive credit score? Let’s sum this up in a few lines.
good credit score indicates to a lender that you have a good reputation for paying off your debts. This, in turn, increases your chances of getting loan approvals and credit cards. Not just this, it can also lead to lower interest rates. With lower interest rates, you can save thousands of dollars while paying off your future loans.
Myths About Credit Scores
There are various myths surrounding the concept of credit scores. Believing in these myths can turn out to be counterproductive and derail you from building a good credit score.
Let’s take a look at two of these common myths about credit scores.
Closing A Credit Card Account Will Improve Your Score
This is how it works. Closing a credit card account can actually shorten your credit history. This means that it might negatively impact your credit utilisation and lead to lowering your credit score.
Checking Your Credit Report Will Hurt Your Score
You SHOULD check your credit reports regularly. It won’t hurt your credit score. In fact, it’s a good way to monitor for errors or fraudulent activities that could negatively impact your score.
Wrapping It Up
If you’ve reached here, we hope that you have a thorough understanding of what a credit score is and how it works.
It is crucial that you do everything in your capacity to build a good credit score. Stay on top of the basics and you shall be good to go.
Finally, if you have any doubts, ping us on the community group and we shall be more than happy to clear them out.
Until next time,