What borrowers really need to know about their credit score
Written by Samantha Long, contributor.
Money is a topic that many people find difficult to discuss, especially those who aren’t used to being financially comfortable. Whether you’re living paycheck-to-paycheck, have more money now than your family did growing up, or are financially savvy, talking about your finances can be an awkward topic. However, being able to talk about money is an important skill for everyone to learn.
Let’s talk about credit scores – what they are, how they’re calculated, and what you can do to maintain your credit. Whilst you might have grown up thinking that all loans are bad, the truth is that many of us rely on them for daily life.
Read on to find our helpful advice, suitable for every type of spender, and take back control of your finances.
The different types of credit checks
Whenever you apply for a loan or a credit card, the lender will usually run a credit check. This is done to assess your creditworthiness – in other words, to see how likely you are to repay the debt. There are two main types of credit checks for individuals: hard inquiries and soft inquiries.
Hard inquiries occur when you apply for new credit, and they may have a negative impact on your score, especially if you run several hard reports in a short space of time. Soft inquiries happen when you check your own credit report or when a lender checks your report for pre-approval purposes, and they don’t affect your credit score. As a result, unfortunately they can be run without your permission.
How your credit score is calculated
The information in your credit history is used to generate a three-digit number, typically between 300 and 850. The higher your score, the more likely you are to be approved for a loan.
There are several different factors that go into calculating your credit score, and there are two main bureaus that calculate credit scores – FICO and Vantage. The two look at the same criteria, but in slightly different weighting.The factors are:
- Your payment history
- Your credit utilization score
- How old your accounts are
- The types of accounts you hold
- Any new accounts you’ve opened recently
By understanding how each of these factors contributes to your overall score, you can take steps to improve your creditworthiness and raise your score over time. Research shows that young people are less likely to know how to check their credit score, so where you can, try and talk to family and friends about how to do this, to share your newfound wisdom.
What should you be doing to maintain your credit?
The first thing you can do to improve your credit is to make sure you make all your payments on time. This includes any loan payments, credit card payments, or utility bills. If this is difficult for you, then talk to your loan company or bank before taking out a loan – the rising rates of interest will make it incredibly challenging to pay it back, however cheap it seems now.
Second, keep your balances low. Whilst you might think it’s better not to open an account at all, regularly paying off a small amount can show companies that they can trust you to make repayments, so consider putting any small bills on a credit card, and then set your debit account to pay the card automatically. However, while this seems like something you could do with multiple cards, multiple times, try to keep these at a minimum so you aren’t racking up credit debt that you truly won’t be able to maintain long-term.
Finally, check your credit report regularly for errors. If you see anything that looks incorrect, dispute it with the credit bureau. By following these simple tips, you can maintain a good credit score and keep your financial life on track.
Want more info about your credit score?
Download this guide here: 10 Credit Score Myths
Published at Tue, 23 Aug 2022 06:30:23 -0500
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By Montgomery County, MD on 2022-09-17 16:32:56