In a day and age where everyone uses credit, there needs to be some way of keeping track of it. Luckily, this is exactly what the handy credit score was introduced to do. But what exactly is a credit score and how does it work?
What Is A Credit Score?
Essentially, a credit score is an indication of your credit history. It takes into account everything you’ve borrowed and purchased with credit. Then, it will amalgamate this into a three-digit number.
This number can range from 0-999. To put it simply, the higher your score, the better! A high score will indicate that you’ve paid back credit reliably in the past. It will demonstrate that you’re reliable with your finances and a low risk to lend to.
Generally, a good score is considered to be anywhere above the 750 mark. Above 650 is considered a fair score. Anything below this and you may find it difficult to get a loan.
What Affects Your Credit Score?
Ever handled money badly in the past and hoped no one would notice? Unfortunately, credit scores ensure no poor financial decisions slip under the radar.
These scores are based on several factors. This includes your payment history, accounts owed, length of credit history, and number of accounts open.
To have a good score, it’s important to try and score highly in all these areas. An easy way of doing this is by knowing what not to do. This will help you to avoid dragging down your score.
For a list of what to avoid, look no further. Here are some of the main offenders that will negatively impact your score:
- Not staying within agreed credit limits and not maxing out your card
- Frequently setting up new bank accounts
- Applying for credit too often
- Missing any payments you owe
- Borrowing more than you can afford
These things are all red flags and they’ll stick out like a sore thumb to potential lenders.
However much you may want to splash the cash on new things or nights out with friends, stop and think. Is this going to max out your credit card? Will it mean you don’t have enough to make your loan repayments?
If the answer is yes, don’t succumb to temptation. You should always prioritise your financial health if you want to achieve a good credit score!
Why Is A Good Credit Score Important?
This may leave you wondering, why does a credit score matter so much?
A credit score is important as it’s what lenders use to assess your creditworthiness.
When any lender is looking to offer you a loan, your credit score may be the first thing they inspect. When applying for, for instance, a mortgage, your score will show if you’re a safe bet to lend to.
Besides mortgages, a good score can increase your chances of being approved for other loans too. It may even help get you more competitive interest rates on these loans. On top of this, a good score can also help you to be approved for credit cards and higher credit limits.
But what if you have a bad one?
A poor credit score won’t make things like withdrawing a loan impossible, but it will make it harder.
How Can You Build A Good Credit Score From A Bad One?
If you’re looking to build a good credit score, no need to fear! There are plenty of simple ways to get going.
First, you’ll need to open a bank account and get a credit card. This will allow you to begin building a positive banking history. Start by using it for small purchases like morning coffees, taxis and meals out.
On anything you borrow, you must make sure you repay it on time! If you’re a forgetful person, try setting alerts for your bills to make sure you never miss a repayment date.
Finally, get into habits like avoiding multiple credit applications and spending below your credit limit. Make sure to also regularly review your credit report. This can help you spot and correct any errors.
It’s hard to underestimate the value of a good credit score. This score will help you to move easily through life's financial stepping stones.
Want to take out a mortgage? Need a generous credit card limit? A good credit score is often the answer.
Understanding what a credit score is can empower you to take control of your financial health. And, by practising responsible credit management, you can open doors to better financial opportunities.
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