Your credit rating can determine how much it will cost you to get credit and even if you can get it at all. Good credit ratings are important, after all, there are a variety of different reasons that we end up having to apply for credit.
We need credit to get student loans, for getting a mortgage on a home, buying a car, or even renting an apartment. Wondering why a single number is so important and how it all works? Well, let’s take a closer look at credit scores and how they work.
What is Your Credit Rating?
Basically a credit rating is a number that is used to help lenders figure out whether they want to give you a line of credit or a loan. The rating gives the lenders an easier way to decide whether or not they want to lend to you when you apply.
The credit rating or score is a whole lot faster than a credit report and basically provides the same information, just in the form of a single number, which saves lenders a whole lot of time.
What Does Your Credit Score Mean?
The score that you are given as your credit score actually has a whole lot of meaning, especially when it comes to prospective lenders. The credit score basically lets lenders take a look at the level of risk that you may be if they end up loaning you money.
It allows them to predict how likely you are to pay your payments when they need to be paid and if you are really likely to repay a loan or line of credit that you get from them.
How Do the Credit Bureaus Determine Your Score?
There are a variety of different scoring methods that can be used to figure out your credit score; however, it is usually the FICO score that is used by most lenders and companies today.
This method was designed by the Fair Isaac and Company, as well as the main credit bureaus, TransUnion, Equifax, and Experian.
There are a variety of different things that are taken into consideration when your score is determined. The following are several factors that are used to come up with your credit score.
- The amount of debt you are in
- Amount of credit that is available to you
- Whether or not you pay your bills on time
- Types of credit that you have
- The amount of new applications for credit you fill out
- The length of credit history that you have
What Can You Do to Increase Your Score?
Even if you happen to have a credit score that is not so great, there are some things that you can do increase your credit score.
One of the first things that you should do is take a look at your credit report and make sure you get rid of information that is inaccurate.
Paying off accounts and still keeping the account open can help as well, since you’ll lower the amount you owe and increase the amount of available credit that you have.
Make sure that you keep credit card balances below 75% of the amount of credit you have available, so it makes your debt to availability ration look better.
Of course one of the most important things that you can do to make your credit score increase is to start paying all of your bills on time. Avoid inquiries on your credit report as well, which can make your score quite a bit lower.
How Long Does it Take to Increase Your Score?
It is important to realize that more than likely you aren’t going to improve your credit score overnight.
However, if you are willing to work at it, over time you can improve that score if you make sure you pay on time, cut down debt, and also avoid any inquiries you don’t absolutely need.
It could take a few months or even a year to see a drastic increase in your score, but it is important that you keep working on it, since it really will make a difference in the long run.
What is a Good Credit Score?
Credit ratings range from 300-850. The higher your score is the better. By learning your credit score, you can put yourself in the position to intelligently negotiate interest rates and terms with lenders.