Many numbers will play a key role in your financial life for different reasons. Among the most important is a three-digit figure that affects nearly all aspects of your financial health – your credit score.
Understanding your credit score is important because it basically determines your creditworthiness. It’s a number usually between 300 and 850 (for FICO scores) that indicates how risky of a borrower you are. The higher your credit score, the better you look to lenders. The lower your credit score, the riskier you look to lenders, and the more likely you are to get denied a financial product like a loan or mortgage.
Having a good credit score can help you achieve major life milestones like:
- getting a credit card
- buying a car
- owning a house
- securing a personal loan
Sometimes, your credit score can even be a factor in whether you get hired for a job because employers may review it to see if you’re considered reliable.
How is Your Credit Score Determined?
Your credit score is based on several factors that are weighed in different ways.
For example, a major part of your credit score is based on how well you’ve made payments in the past. A smaller part of your credit score is based on whether you’ve opened new credit recently.
Why Your Credit Score is Important
You credit score is one factor lenders consider when you apply for financial products like mortgages, loans and credit scores. If you don’t have a high credit score, lenders may deny your application or give you a higher interest rate that can cost you more.
With higher credit scores, you can get approved for more financial products and get better rates on your loans. Having a lower interest rates on a mortgage, personal loan or credit card can save you a lot of money over the long term.
What is a “Good” Credit Score?
The FICO score, which is the most widely used credit score in the U.S., generally ranges from 300 to 850. By law, you are entitled to one free credit report from each of the three main credit agencies once a year. They are:
If you hold a credit card, your credit card company may also provide you with your FICO score updated monthly.
You may notice that your credit score differs from source to source. This is very normal and can happen for two reasons. First, your score may differ depending on the credit reporting agency because each agency calculates them in a slightly different way. Second, while your FICO score is the most commonly-used score, it is different than other types of credit scores like your VantageScore.
Finally, keep in mind that your credit score can also change daily. So, you might see a difference in your credit scores if they were pulled on different days.
How Can You Improve Your Credit Score?
You can improve your credit score in several ways, from reducing your debt to making sure all your payments are made on time. Raising your credit score usually takes time, but you can take specific easy steps to help you boost your score over several months.
The Bottom Line
Understanding what your credit score is and what you can do to improve it will go a long way in helping you meet your life goals. Keep your eye on your credit score and take steps to improve it to stay in good financial health.