Get Comfortable With Your Credit
A credit score is a number used by financial institutions and credit card companies to determine risk level when issuing you a loan or a credit card. This number also plays a vital role in determining the interest rate and whether or not you should be approved. Do you know what your current credit score is or how you can obtain it?
Your credit report is an overview of your loan payment history, certain bill payment history and status of your credit accounts. Your credit report is important because it influences your credit score. Generally, a higher score means easier approvals for credit and lower interest rates. This makes your three-digit credit score one of the most important numbers in your financial life.
Breakdown of a Credit Score
- 35% is based on payment history
- 30% is based on capacity
- 15% is based on length of credit
- 10% is based on new credit
- 10% is based on mix of credit
Credit scores range between 300 and 850*. Credit scores less than 580 mean you could be denied a loan or credit card. Scores ranging from 580-740 could mean you may not get turned down for a loan, but you will likely be charged a higher interest rate. Scores above 740 typically result in lower rates and the best approval odds.
- Very poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Excellent: 800 to 850
*Interest rates and approvals can vary based on the credit score. Actual scores may be interpreted differently depending on the financial institution.
Review Your Credit Report
By law you are entitled to a copy of your credit report annually from all three credit reporting agencies - Experian, Equifax and TransUnion - once every 12 months. You should check your credit reports from each of the 3 bureaus annually. Doing so will make sure your credit is up-to-date and accurate. An error on your credit report could negatively affect your credit score and you don’t even know it. Each reporting agency collects and records information in different ways and may not have the same information about your credit history, so it’s important to review all three. Keep your eyes open for recent inquiries, late payments, collection accounts or judgments that could be hurting your score. If you find an error, contact the credit agencies to dispute as soon as possible.
Understanding your credit report can go a long way toward helping you achieve a better credit score in your 20s and beyond. Reviewing it regularly can help you keep track of your progress as you work on improving your credit score. Above all, it’s important to use credit responsibly. A good credit history and score can make all the difference when it comes time to purchasing a home, buying a car, or paying for college, and ultimately achieve your financial goals.