The term “credit score” can be something that is tossed around a lot in conversations related to loans and finances, but you may not be familiar with exactly what your score means. Taking the time to check your score and understand how it was calculated can benefit you in many ways. You can leverage a good score into better financial opportunities, or you can take the time to recognize a low score and work to improve it.
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What Does Your Number Mean?
Credit scores generally fall between the numbers 300 and 850. The higher your score, the better credit you have. You can figure out your current credit score by using a free credit check. It can be a good idea to check your credit score about once a year in order to monitor it and, if necessary, make an effort to increase it.
Why Do Credit Scores Matter?
Your credit score can impact you in many different ways. It can determine the type of loans you qualify for as well as the interest rates you can get. Better credit scores can be used to gain better financial opportunities, get the loans you need, and be able to take out credit cards with great interest rates. In some situations, a good credit score can even help you get better deals on insurance or even rent.
What Is a Credit Score Based On?
The first step to increase your score is to understand what it’s based on. Credit scores are calculated based on a few different factors. These factors are:
- The amount of time you’ve had a credit history
- The types of accounts under your name
- Your history of making payments
- Any debt you currently owe
- Credit-related actions you’ve taken recently
Your score partially depends on how long you’ve been doing activities related to your credit, such as taking out loans or using credit cards. This means that if you haven’t done anything credit-related you may have a low score or even no score at all. Your score is also based on how reliable you have been in making payments. Generally, actions that are seen as more responsible, such as making payments consistently on time, lead to a better score. Missing payments or taking actions that may be perceived as risky choices can lead to a lower score.
Can You Increase Your Score?
If you have a low score or are building up your credit for the first time, you can make strategic choices to increase your credit. One of the first steps you can take is to pay off as many accounts as you can. If you don’t currently have any accounts that report to credit bureaus, opening an account and keeping up with your payments can be a great way to get started. Keep in mind, however, that opening too many accounts can be seen as risky behavior and may hurt more than help.
At the end of the day being as responsible as you can and keeping up with payments is the foundation of building up a credit score. Depending on the underlying reasons for your current score, building it up may take some time. While a low score can be discouraging, remember that it is almost always possible to build it up by making a few changes.
Benefiting From Good Credit
Once you understand what a credit score is and how it’s determined, it can be a great time to check your score and determine if it needs to be built up. Having a good credit score is an achievable goal that you can work towards. Once you get there, you should find that it is much easier to accomplish a wide variety of financial goals.