The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
This post originally appeared on The Financially Independent Millennial and has been republished with permission.
Are you wondering why your credit score is important, and how you might improve it?
At some point, you will most likely need to apply for credit. Then, when you apply for credit, you have to demonstrate to your lender that you can repay the loan. One of the tools that lenders use to build that trust, among other things, is your credit score.
Your credit score is usually the very first thing that a lender will check. Specifically, in North America, there are 3 primary credit reporting agencies: Experian, Equifax, and Transunion. All three credit reporting agencies are used in the United States, while in Canada, only Equifax and Transunion are used.
Lenders may choose to check one or more credit reporting agencies. To make it even more complicated, each credit reporting agency has various iterations of their own credit score. So, your score may be different, depending on the credit reporting agency.
Your credit score is a three-digit number (Usually between 300-850) and is created by a mathematical algorithm made up of the following (According to FICO):
Often, those with the highest credit scores seem to have a few key factors in common:
A high credit score can make it easier and cheaper to access financing for large purchases, when you need it. For example, your mortgage will likely be the single largest purchase of your life, followed by your car, and there’s (almost) nothing worse than being declined for the funds you need to buy your dream home or car. Or worse, having to pay a much higher interest rate than someone with a higher credit score.
If getting a mortgage is important to you, it’s best to keep your credit score as high as possible–this will help get you the very best possible rates. Interest rates on a mortgage are very important as they’re based on a high amount of borrowing. So, even the smallest point difference can make 100’s, 1000’s and even 10’s of thousands of dollars of difference.
Obtaining a credit card with a higher credit score is also usually easy. If you can’t apply for a credit card due to a low credit score, you might consider a secured credit card, and pay it off regularly for at least a year. Then, ask for your card to be converted to an “unsecured” version.
Look to keep very few (i.e. three or four) accounts open. For example, keep a credit card for daily use which is paid off in full regularly (I.e. NEVER pay credit card interest). You can also have a line of credit (with a low-interest rate), and keep a low balance. So with that, CLOSE the accounts you don’t use.
If you’re VERY good with your money, ask for credit limit increases. ***Careful though, if you aren’t good with money, this can be a double-edged sword.
Second, work to pay off your balances as fast as possible. Credit cards, car loans, student loans, etc. As these are paid down, your credit score should rise.
Having a mortgage and car loan won’t hurt. But regardless, be sure to make all your required payments on time. As for old credit accounts, the popular belief is to keep them. You could keep the oldest one, and not worry about the others.
Missing a payment indicates you might be in a debt spiral. It depends on how many days were missed. For example, if you have a credit card and the statement’s minimum payment is $100, due on March 25, and you pay it on March 26, there’s likely no issue. If you’re 30, 60, 90 or 120 days late, watch out. These are really late payments and can significantly drop your score, almost overnight. Then, it can take many months, and perhaps years, for your credit score to recover from such an incident. So, be sure to make (at the very least) your minimum payments on time!
It’s important to regularly check your credit report. Just like checking your bank balances frequently, it’s entirely possible that errors might come up on your credit report. Those errors should be disputed. This can also help prevent a catastrophe should your identity be stolen.
June 14, 2023
Credit 101
January 25, 2022
Credit 101
February 19, 2021
Credit 101