Financial Education

Credit score: what you need to know for a healthier financial life

Do you know what a credit score is? What about your credit history? If you’re unsure, it is time to find out what these numbers represent in your life!

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Your credit score explained in simple terms

credit score
Learn what you need to know about a credit score! Source: FreePik

Do you know what a credit score is? What about your credit history? If you’re unsure, it is time to find out what these numbers represent in your life!

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A healthy credit score is vital for various reasons, from getting approved for a loan to renting a new apartment. So, read on and learn everything you need to know about credit scores!

What is a credit score and what does it mean for your finances?

credit score
Learn the benefits of having a good credit score! Source: FreePik

Before we begin exploring definitions, you must remember that this three-digit number is one of the most critical factors in your financial future.

A credit score is designed to represent your creditworthiness. It helps lenders decide if you are a credit risk or not. This number is based on your credit history from the previous 5 to 7 years.

Subsequently, it will determine whether you get a mortgage, a loan, a credit card, or even the interest rates you’ll be charged for. Pretty important, isn’t it? 

The US has three major credit bureaus: TransUnion, Equifax, and Experian. They are responsible for collecting and analyzing the information in the credit market related to the consumers. 

Two of the most popular types of credit scores are the FICO and the VantageScore.

Both are based on the information collected from the credit bureaus. However, FICO Score can be most commonly used by financial institutions.

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Different ranges of credit scores

Your credit score is the key to getting great rates. So remember that the higher your score, the better the terms you’ll get!

The credit score ranges from 300 to 850. The results may vary according to how you evaluate your data in the different scoring models, but generally, it is based on the following rates:

  • 300 to 579 means you have a poor rating;
  • 580 to 669 indicates you have a fair credit rate;
  • 670 to 739 standards you have a good performance;
  • 740 to 799 means your ratings are very good;
  • 800 to 850 indicates an excellent rating.

But what if your score is 0? It may seem like a bad thing, but contrary to what you might think, it doesn’t mean you’re a bad borrower.

A zero rate only tells the lender that you are not currently participating by incurring debt.

For some people, it might be a good thing. Although, if you want to maintain a healthy credit score, you should have at least one active account.

What are the benefits of having a good credit score?

The benefits of having a good credit score are numerous. With healthy credit, you can start enjoying the perks of having your financial life under control.

For example, with good credit, you’re more likely to qualify for credit cards with lower interest rates. Also, you will be approved for higher credit limits more easily.

Getting better car insurance won’t be a problem since a good score will help the insurance carrier to decide you’re worth approval.

Companies might also offer you other kinds of insurance once they learn about your credit.

In addition, it will make you look more suitable for potential employers, considering that some companies may analyze your credit reports.

Want to rent a house or apartment? The landlords will check your rates as part of the tenant screening process. Good credit will ensure you will be approved as a renter. Helpful, isn’t it?

What affects your credit score?

As previously said, credit reporting agencies will plug all your information into algorithms that assign your rate. Five essential factors will directly affect your credit score:

  • 35% of it is based on payment history, so remember that making on-time payments will help you raise your credit;
  • 30% of it is your credit utilization. The credit limit you’re using, which accounts you have balances, and how much you owe, for example;
  • 15% is determined by your credit age, counting the age of your newest and old accounts;
  • 10% of it are the types of credit you use, whether installment accounts or revolving accounts;
  • 10% is your request for new credit. It considers your recent activity of applications or new accounts.

So if you want to maintain a reasonable credit rate, you must pay attention to these five components and ensure you’re under control.

How can you check your credit score?

credit score
Check out everything you need to know about credit scores! Source: FreePik

Checking your score is simple! You have many ways to do it, including free options. But remember that you don’t have only one credit score.

You can consult it from your loan statement, credit card company, or financial institution. Many of these institutions provide credit scores for their customers.

You can also check it with the major credit bureaus. For example, you can get your FICO Score through the Experian credit report for free.

Another excellent way to check it is to use free credit scoring websites or credit score services.

Lastly, ensure that all that information is correct and complete when checking your ratings. Keeping a closer eye on your score will help you improve it.

Knowing your credit score is the first step in controlling your money and achieving healthier finances.

Want more tips? Check out the following post and learn everything about how to start budgeting!

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About the author  /  Beatriz Vieira

Beatriz Vieira is a producer and copywriter who is part of the finance writer team in this portal. She has a degree in Journalism and aims to improve her bilingual writing skills. Her subjects of most significant interest are culture, finances, and self-development.

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