How does your credit score work?
We all hear about our credit scores and how it affects our ability to get access to loans. While some places give loans for bad credit, most financial institutions and even potential employers consider your credit score before taking you on. How exactly does it work? This article will take a quick look at how your credit score works, what it impacts, and how to improve it.
What does your credit score influence?
Besides the ability to apply for loans and credit cards, if you have a bad credit score, you can also struggle to be approved for a rental agreement or cell phone contract. Many prospective employers do comprehensive background checks, and a poor credit score can influence your ability to get a job. Utility companies may require you to make a security deposit before connecting your gas or electricity. In some states, you’ll even pay more for insurance.
If you think a poor credit score only influences your ability to get access to a credit card or personal loan, you’re wrong. It impacts a wide variety of day-to-day activities in your life.
How does your credit score work?
Your credit score is a three-digit number that’s compiled from credit reports. Companies like FICO and VantageScore use an algorithm to prepare your score. Whenever you make hard inquiries for credit, the financial institution checks the score through credit bureaus like Equifax, TransUnion, and Experian. Similarly, with cell phone companies, realtors and various others.
There are a few aspects that make up your score:
- The biggest portion, at 35%, looks at your payment history. The algorithm determines how often you make your debtor payments on time.
- The next portion of 30% is focused on the amount of debt you owe and how much of the available credit you utilize.
- 15% of your score looks at how long you’ve had credit available.
- The last two pieces are divided into 10% each. These focus on the variety of credit you have and any new inquiries you make.
A good credit score is when you fall between 670 and 739. If you have between 740 and 799, it’s very good, while above 800 is exceptional. Scores between 580 and 669 are seen as fair, and you can still get access to loans and other facilities.
How can you improve your score?
The most important thing you can do for your credit score is always to make payments on time. If you get overwhelmed with multiple payments in one day, you have the option of setting up an automatic payment system for recurring payments, like your car or student loans. You can also ask debtors to change the dates so that you always stay on top of payments.
Don’t overextend your credit. While it’s good for your score to utilize some of your available credit, you shouldn’t use too much. Pay smaller loans off as quickly as possible.
When enquiring about new credit, ensure that you do so at various places. Be careful with hard inquiries where the institution will access your report, which will negatively influence your score. Soft inquiries, however, have no impact.
If you have a poor credit score and need help with your finances, especially if you want to start a business, you can get help from various companies.
Your credit score stays on the system for up to seven and a half years. Every time a potential employer or new renter looks at your profile, they will be able to access your poor credit score. It’s important to do everything you can to have a good score and to keep it that way.