You know you have credit and you know you have a credit score. But, do you know how these things interact with each other? Do you know how they are used?
We all have some vague idea, right? We get that it’s important and there’s basic information out there about doing this to increase your score and don’t do that, it’ll decrease your score. Some of this information is correct while others are myth. We’ll jump into that, but let’s start by talking basics.
What Is A Credit Score?
When a consumer applies for credit lenders want to know what risk they’d take by loaning money. When lenders order a credit report, they can also opt in to buy a credit score that’s based on the information in the report. A credit score helps lenders evaluate a credit report. It is a number that summarizes credit risk, based on a snapshot of a credit report.
It is important to understand that not every credit score offered for sale online is a FICO Score. There are actually multiple different scoring options available, but the most commonly used score is FICO with up to 90% of lenders using FICO to make lending decisions.
Ultimately, credit scores influence the credit that’s available and the terms that lenders may offer.
What Is A Good Credit Score?
FICO Scores have a 300–850 score range. The higher the score, the lower the risk. But there is no magic number whether a specific person will be a “good” or “bad” customer.
While many lenders use FICO Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.
How Can I Improve My Credit Score?
As the information in your credit report changes, so will any new credit score based on your credit report. This means your FICO Scores last month are likely not the same score a lender would get from the credit bureau today. But, that doesn’t mean that you shouldn’t be aware and working to improve your score. Here’s a few ways you can do that:
Make healthy repayment habits.
- Pay your bills on time.
- Get current with missed payments.
- Understand that paying off a delinquent loan won’t remove it from your report.
- Contact your creditors or a credit counselor if you’re having trouble.
- Manage your debt.
Keep balances low.
- Pay off debt rather then moving it around.
- Don’t close unused credit cards.
- Don’t open unneeded credit accounts.
- Be smart about credit.
Shop for a loan within a focused period of time.
- Re-establish your credit history if you’ve had problems.
- Check your credit report.
- Don’t open new accounts one after the other if you’re new to credit.
- Apply for and open only necessary accounts.
- Have credit cards — but manage them responsibly.
- Remember that closing an account doesn’t make it go away.