Credit score is probably a familiar term. Chances are, you’ve heard it impacts your creditworthiness. It’s important, but why? How does it impact you financially? Is a credit score needed to refinance?
If you have any of these questions, read below. Take control of your credit score; understand what it is and how it’s used. Secure the future of your finances with a good credit score.
What Is a Credit Score?
Your credit score is a number measuring your creditworthiness. It ranges between 300 and 850. This score is based on your credit history. Your credit history measures your ability to repay debt. It details how many accounts you have open, how much you owe, the amount of credit you’ve used, whether your bills are paid on time, and whether you have any bankruptcies or liens.
The higher your score, the more attractive you are to a lender. It lets a lender know that you, as a borrower, are low risk. You pay your bills in full each month, do not have more than four credit cards, and keep your balances low. This earns you a higher score and more opportunities. A lender looks at your score to determine eligibility. You will also qualify for better rates with a higher credit score.
You can check your credit history with a free credit report through the credit bureau or credit reporting agency. If your score is lower than you like, you can repair it and improve your credit score with achievable steps. Pay your bills on time, reduce credit card debt, limit applying for new credit cards, or co-sign with someone who has good credit. Focus on improving the factors most affecting your score. More on this later. You should also check your credit report for errors and correct them.
How Is Your Credit Score Calculated?
Credit reporting agencies report, update, and store your credit history. The information they collect is evaluated and used to calculate your score. There are some differences within each credit bureau, but each focuses on a few main factors:
- Payment history
- Total debt
- Length of credit history
- Public records
- Number of inquiries into a credit file
Payment history accounts for 35% of your credit score. Do you pay your bills on time? Used credit vs. available credit reflects your total debt. This counts for 30% of your score. What is your credit utilization? The length of your credit history counts for 15%. The longer your credit history, the less risk you pose. Public records include a history of bankruptcy or collection issues. This counts for 10% of your score. No prior history of bankruptcy equals less risk. Finally, inquiries count for 10%. An inquiry affects your score when seeking new credit. The more new credit you apply for, the more it affects your score. Limit new credit and keep your score higher.
How Is Your Credit Score Interpreted?
You have your credit score number, but how do you interpret it? What do the numbers mean to a lender? How does your score impact you financially?
Each creditor interprets its own ranges for credit. However, a score commonly breaks down into several categories:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
How Does Your Credit Score Affect Eligibility and Rates?
Since your credit score determines creditworthiness, you can gain a lender’s confidence with a higher credit score. Communicate that you will honor your debt in a timely fashion. A good score means you are creditworthy.
Unlock better mortgage rates and qualify for refinancing with a score of 700 or higher. A score between 740 and 850 is an excellent score for buying a house. Your credit score also determines refinancing eligibility. The minimum credit score needed to refinance is between 620 and 720.
A lender looks at these scores and determines eligibility and rates. If you are below 640, a lender will charge interest at a higher rate. Or you may need to pay back the loan sooner. Lower scores equal higher risk. Higher scores equal less risk. A lender typically offers lower interest rates for your mortgage with a higher score. Aim for a score of 700 or above. Work to improve your score if it is lower.
How Can You Improve Your Credit Score?
Qualify for better rates and improve eligibility by repairing your credit history. Minimize your risk to a lender and work on improving your score:
- Pay bills on time:With six months of on-time payments, you will notice your score improving.
- Keep old accounts open:If you have an old card you don’t use, keep the account open and stop using the card instead. Closing the account may affect your credit utilization. Prevent lowering your credit score by keeping it open.
- Increase credit limit:Increase the credit limit on your credit card accounts. Be careful to not spend the increased amount. Increasing the limit while keeping spending down achieves a lower credit utilization rate.
- Partner with a credit union:Tap into great rates with a credit union. Credit unions typically offer lower interest rates. Choose a credit union and keep what’s yours.
Check your credit history and practice good repayment habits, and you can unlock financial potential with a higher credit score. You’ll qualify for better mortgage rates and increase your eligibility for refinancing. Improve your credit score to secure more freedom for your financial future!
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