A credit score is a value that measures a person’s reliability. Based on credit history, it determines the likelihood that a person will pay his or her obligations.
Payment history, credit utilization, credit history and types of credit accounts are some of the variables involved in the credit score calculation.
The FICO® Score, which ranges from 300 to 850, is the most widely used credit scoring model in the United States.
Higher scores indicate greater creditworthiness. Lenders and other financial organizations use credit scores to assess the risk of lending money to a particular person and to set credit terms, such as interest rates and credit limits.
According to FICO, a “good” credit score can range from 670 to 739. However, a good credit score can vary depending on the lenders or creditors, as they may have different criteria.
A “very good” credit score ranges from 740 to 799, and an “exceptional” credit score ranges from 800 to 850. Typically, the better your credit score, the more likely you are to be approved for credit and receive benefits such as lower interest rates.
Importance of having a good credit score
By having a good credit score, you can receive many different financial benefits, such as:
Lower interest rates
Interest is one of the costs you pay when you borrow money and the interest rate you receive is usually based on your credit score. By having a good credit score, you can qualify for better interest rates, so you’ll pay less finance charges on loans or credit card balances.
Access to credit
A good credit score gives you access to loans, credit cards and other financial products with advantageous conditions and interest rates. This means you will have cheaper and easier access to credit when you need it.
Renting or buying a property
Even if you have a good rental history and a good salary, many landlords may reject your rental application if you have a bad credit history, so having bad credit can reduce your chances of renting a home. On the other hand, having good credit can increase your chances of being approved for a mortgage.
Higher loan limits
The amount of money you can borrow is based on your credit score and your income. By having a good credit score, banks are willing to lend you more money because you have proof that you can pay it back on time.
Some ways to improve your credit score
If you have a low credit score, there are several ways to improve it.
- Paying bills on time
It is important to pay bills on time, as late payments can hurt your credit score. Setting up periodic reminders or automatic payments can help you pay on time. The history of paying your bills on time is the most important scoring factor in FICO scoring systems, so paying on time will certainly improve your credit score in the long run.
- Opting for different types of credit
Having a mix of credit types, such as credit cards, mortgages and loans, can indicate to lenders that you are responsible for different types of credit and will also help you improve your credit score.
- Keeping credit utilization down
It is not necessary or recommended to use all of your available credit. Credit utilization is the percentage used of your credit limit. For example, if you have a $1,000 limit and use $500, your credit utilization is 50%. It is preferable to keep credit utilization below 30% to avoid a negative impact on your credit score.
Conclusion: Be responsible and coherent with your credit.
Having a good credit score is important to your finances and can certainly impact many aspects of your life. It’s critical to develop good credit habits early on, such as paying bills on time, keeping balances low and checking your credit report frequently to ensure its accuracy.
It takes time and effort to establish good credit, so be patient, responsible and consistent with your credit habits. Your credit score will improve over time.