What is Credit?
A Credit Score is a system used by creditors to evaluate your financial history and use it as a basis to decide whether or you are a reliable individual to do business with or to offer a loan to based on the risk associated with your financial past with financial institutions. Basically, if you need money from a financial institution to buy a car, put an offer on a house, or even get a loan for grad school, your credit counts. Credit Scores can range anywhere from 300 to 850, with 300 at the end of the spectrum that incurs the highest risk if offered a loan, and 850 showing the end of the spectrum with the lowest risk if a loan is extended.
What goes into my score?
Multiple factors come together to create a final credit score for every individual. Credit scores take into account your history of paying bills on time, if you have ever gone above credit limits, the amount of time you have been establishing your credit, the amount and types of credit accounts you have, and if you have recently attempted to establish a new line of credit.
Pro tip: Credit Utilization
A little known fact is that even if you do everything right, your use of credit cards can also vastly affect your credit score. It’s an industry-wide tip that for a good credit score, you should have a credit-utilization ratio of around 30%, however it’s recommended that you have even less than that. Essentially, you should only use your credit up to 30% maximum of the total limit you are given. So if your credit card has a $1000 limit, use it up to $300 or pay it off every time it reaches that amount instead of paying it off in one lump sum at the end of every month. You can also increase your credit limit, but only in trusting that you will be able to remain in the bounds of the new and higher limit.
How do I check my score?
Fortunately, in this day and age there’s no shortage of ways to check your credit score. According to federal law, any individual can access an annual free credit report from each credit reporting agency at annualcreditreport.com . You can also visit the FICO website to quickly check your credit score and get an accurate, real time estimate of your score.
Pro tip: Hard Inquiries vs. Soft Inquiries
Hard inquiries are when financial institutions check your credit score, usually when you apply for a loan, a new credit card, or a mortgage amongst other things. Hard inquiries can possibly lower your credit score by a few points, especially if many are done in a short period of time. Some examples of hard enquiries are when you apply for an auto loan, a mortgage, or to rent a car. These usually hurt your score because too many hard inquiries show that you may be applying to too much credit at once, and may not be able to afford to do so. Building credit is like love ~ it just takes time. Soft inquiries, unlike hard inquiries, do not affect your credit score. Soft inquiries are when your credit report is checked as part of a background check, and these usually occur without your permission. For example, a financial institution may be checking on your credit while pre-approving you for a card, or an employer may be looking into it as part of your background check.
Why do I care?
Your credit score can affect your life from end to end, and a poor score can cost you more in the end. Your credit score affects your financial and education life in numerous ways, such as whether you will be approved for credit cards, home loans, car loans, insurance, or student loans amongst other financial responsibilities. Your credit score can also largely affect the interest rate you get on several loans. For example, if you have a poor score you may end up paying higher interest on a loan, such as a 20% interest on a car loan. That basically means you’ll be buying 1.20 cars at the end of your payment, but you only own 1. Your credit score also affects whether or not you get approved for different housing situations. You may be a few simple points away from getting your dream home or losing it for good.
How Can I Improve My Score?
There are a few sure ways to improve your credit score and keep it strong. Be sure to always pay your bills on time, keep the balance on your credit cards low and pay off frequently, do not apply to excess credit, and minimize your outstanding debt. Though there is no quick fix for your credit score, if you develop good banking habits then over time your score will begin to improve.