What is a Credit Score and Why Does It Matter?
Your credit score is made up of 3 numbers. These 3 scores are calculated based on your ability to pay back debts (and pay them back on time). The FICO credit score is the score that most companies look at. Based on this number, companies or potential lenders determine if and how much to trust you. Sometimes a poor score can give you a smaller limit of credit on a credit card or amount you can get for a loan. Although you may think it would be better to not have credit at all, credit is absolutely necessary to do things like purchase a house or a car. Sometimes in Los Angeles, it’s even necessary just to rent an apartment.
Credit scores range between 300 and 850. Most credit scored fall between 600 and 700. A score above 700 is usually considered a “good” credit score.
Not only are credit scores important when a lender determines if they’ll give you a loan/line of credit and how much to give you, but it also determines the interest rate you’re given. Interest is a percentage of the money borrowed that you will have to pay back (on top of the principle amount, or the amount you borrowed). Usually these fees are calculated into a loan’s monthly payments. For credit cards, interest usually applies if you don’t pay off the full price of the items you’ve purchased right away. Once you have a balance on your credit card (past the first month and the usual 30-day grace period) the amount you owe will accrue interest. Sometimes that interest is calculated and added daily. The better/higher your credit score is, the lower your interest rates usually are. Below are examples of what interest rates look like for an auto loan based on FICO credit scores.
The better your credit score is, the more likely you are to be approved for loans that can help you buy a car, start a business, or buy a house in the future. It determines your monthly payments on loans, how much you can even borrow, and how much you have to pay additionally. Your credit score rules so many things in life, but there are many ways to successfully build and manage this score for a successful future. Below are some ways to improve/build your credit score:
- Pay your bills on time
- Have at least 3-6 open and active credit accounts
- Have 1-2 loans
- Keep your credit card balances low
- Have a stable record of credit use
- Keep your accounts open for a long time
- Avoid too many applications for new credit
To find out how student loans can help improve your credit score, tune into next week’s blog!