Must-know facts about your credit score

By: Yogesh Prasad, CFA, CAIA

1. Making sense of your credit score: What you need to know

Credit scores are often regarded as statistical values to lenders, but they utilize this information to assist in deciding whether or not they wish to lend their funds to potential borrowers.

A credit score impacts the borrowing of funds as much as it does when one is requesting a new borrow, credit card or even a phone contract. Nonetheless, there is a lot of confusion about the elements that have a bearing on its determination. Allow us to clarify that.

2. What is a credit Score, in simple terms?

A credit score is a manageable figure, which shows a person’s ability to repay borrowed money. It’s not a credit report that contains details of all your credit activities. Rather, it takes that abundance of information and compresses it into just three numerals that are vital: the credit score.

Your income, age and occupation for instance are all factors that are omitted in the scoring. Such factors could further be considered when applying for a loan, but they are not factors in the process of scoring itself.

3. Why a higher score is beneficial to you

Whatever the case regarding credits, it would seem, the higher the score the better. Less risk means lower interest rates or better terms of loans and this is what the lenders see in high scores. Scores usually fall in the range between 300 and 850, with 729 being the average score. The best score one can achieve is around 750 therefore this should be the aim.

4. The importance of timely payments

The most critical action that you can take towards improving your credit score is paying your bills on time. It contributes to 35% of your score so late payments are detrimental. Use alerts, set up automatic payments—anything you need to ensure that you stay on top of your obligations.

5. Don't max out your credit

How much of your credit limit you’re using also matters-a lot. This is called your credit utilization rate, and it accounts for 30% of your score. Using less than 30% of your available credit is ideal. If you can, pay down large balances quickly to keep your score healthy.

6. Time helps build-up trust

The longer you’ve had credit, the better. Your credit history comprises 15% of your score. That said, even if you’re new to credit, you can still have a good score by using credit wisely and paying on time. So, closing on your oldest credit card is not necessarily a good thing.

7. Go easy on opening new accounts

8. Mix it up

Having different types of credit, like credit cards, a car loan, or a mortgage, can give your score a small boost. Lenders like to see that you can manage different kinds of debt responsibly, but you don’t need every type. Having different types of necessary and productive debts could actually help you improve your score, given that you manage them well.

9. Checking your score won't hurt it

Most people believe that checking their credit score reduces it, which is merely a myth. You can check your score for free via apps, banks, or credit bureaus, and it won’t lower your score. It’s actually wise to keep track of it.

Knowing how credit scores work empowers you to take your financial future into your own hands. Little steps add up over time, and the better the score, the better the opportunities will be.

Disclaimer

While we try to provide the most accurate and updated information, please note that this blog post is for general knowledge and informational purposes only. It is not professional financial advice. Everyone’s financial situation is different, and it is always best to consult with a qualified financial advisor regarding your specific needs and circumstances. The information herein is to my knowledge and research, but sometimes it is always good to authenticate information from different reliable sources.