While navigating the financial world, you've probably heard that credit scores are an important barometer for consumers. You may have been taught this in school, heard it from tellers at your bank or noticed that your parents concentrate on it. These people are right, because this score can impact your investments. But for those who are new credit-card holders or have had cards for a number of years and are just not aware of the significance of this, it is important to understand why your credit score is such a big deal. By understanding this financial component a bit better, you will have an easier time repairing your score if necessary. Here is a primer about credit scores:
What is a credit score?
Lenders and other financial institutions look at credit scores in order to determine how much of a financial risk you are going to be. When you apply for a mortgage or a loan for a car, the lenders want to make sure that you are going to be accountable and pay it back. If you have a low score, lenders will be a bit more hesitant to grant you a major loan that might be worth hundreds of thousands of dollars.
Along with playing a part in whether you will get approved for a loan, a score will impact your chances of getting a new credit card and good interest rates.
Impact of a credit report
Lenders will inspect your full credit report. This document is a comprehensive history of your credit. Past loans, bankruptcy filings and even late payments will show up here. The history of your credit will determine your score, and here are a few components that will be factored in:
- Payment history
- Amount owned
- Number of new accounts opened in a short time frame
- Length of credit
- Types of credit used
When a lender gets a hold of your score and report, they will provide you with an explanation as to why your score is at its current number. If your application for a new account was turned down because of your score, you may want to start improving it.
What goes into a credit score
Being denied a loan because of the state of your score can be disheartening, but you don't have to give up, because there are a number of ways you can improve it. But before you start working on it, you'll need to understand what can impact your credit score. These are some of the most common ways you can hurt your credit score:
- Late payments
- High credit-utilization ratio
- Being sent to collections
- Filing for bankruptcy
- Defaulting on a loan
- Errors on a credit report
Using your credit report can be a great tool to help you navigate credit repair. You are allowed a free credit report every year from each of the three major credit bureaus: – Equifax, TransUnion and Experian. If you space these reports out throughout the year, you can make sure you stay on top of your score. If you want to get a fourth report, you will have to pay for it.
Be forewarned that fixing a credit score will take some time, but if you pay down your balances and make payments accordingly, your score will improve.