When you apply for a home loan, credit card, or for insurance, lenders check your credit score to help determine if they will offer you credit. The first step to building good credit is understanding credit scores, how they’re calculated, and why they matter.
What is a Credit Score?
Your credit score is a number that typically ranges from 300 to 850. It’s calculated using credit information reported about by banks, lenders, and other financial institutions, which is reported to the three main credit bureaus– Equifax, Experian, and Transunion.
Your score may vary according to each bureau, but they're all based on information found in your credit reports. You can access your credit report annually. Be sure to review your report regularly so you can understand what’s needed to improve your score.
Why Your Credit Score Matters
Your credit score is important– it impacts your ability to rent a home, get a loan, a credit card, a mortgage, and auto insurance. Your credit score also will determine the interest rates that lenders will offer you.
300 to 600 on the FICO credit scale is considered a low score which means very unlikely to repay. So a lender is unlikely to lend to someone with a score that low.
600 to 700 is considered a fair score.
700 to 850 is considered a high score which means very likely to repay. So a lender is far more likely to offer you credit.
The higher your credit score, the better the loan terms and interest rates.
What Influences Your Credit Score
Your credit score is determined by the following factors:
- Payment history
- Current levels of debt
- Length of credit history
- New Credit
- Types of credit used
What Can Cause a Credit Score to Drop
- Late payments– Just one late payment can reduce your credit score by 50 points or more.
- Severely late payments– The quicker you can make a payment, the less severe the reduction of your score.
- Multiple late payments– One missed payment could be accidental but four could be very damaging to your credit.
If your score is lower than 670, you need to do some work on your credit rating– especially if you’re planning to buy a home. Improving your credit score means improving your chances to receive the best mortgage rate.
How to Improve Your Credit Scores
- Know your credit report by requesting it annually
- Dispute any errors– Contact credit reporting agencies with a letter about the error(s).
- Pay down credit balances– Always pay your minimum statement on time each month and pay more when you can.
- Set up payment reminders– This will help you always pay on time
- Improve your credit utilization– Your balance-to-limit ratio. Try to keep credit utilization under 30%. (IE. If your credit card balance is $1,000 and you have a $10,000 credit limit, your credit utilization is 10%.)
How to Check Your Credit Reports & Scores
You can check your credit report for free every 12 months at the three major credit reporting agencies, and through AnnualCreditReport.com.
You can check your credit score more frequently – they’re updated once a week –and you’ll want to make sure you check your credit scores regularly.
Check your scores for free at one of these sites:
Managing your credit scores is really important– especially if you’re in the market to purchase a home. Make sure you follow these tips for understanding and improving your credit scores.
Ready to look for a home? Contact REsolutions today!