Credit scores are used in a lot of transaction. As a gauge for an individual’s creditworthiness, a credit score is what, landlords, mobile service providers, and even potential employers use to determine if there that said individual is a financial risk or not. This is also what credit lenders will use to determine what terms can be offered to a borrower and the rate that comes with the loan. The higher the credit score, the less risky an individual is for defaulting on financial commitments.
The FICO credit score has long been the dominant marker of creditworthiness with some 10 billion scores sold each year to lenders. The score is based on information from your credit report and is calculated in five general categories. Namely these are:
- Credit mix
- New accounts and credit requests
- Length of credit history
- Total indebtedness
- Record of timely payments (payment history)
Together, these five things make up the credit score. It is then matched to a range from 500 to 850. Typically, individuals with a score of 700 and higher have a good credit score. These people will get to enjoy lower interest rates and will most likely get their loan requests approval. For individuals with scores below 600, they are considered the riskiest customers to have.
Benefits of a good credit score
A good credit score allows an individual plenty of perks. Here are some of the things that a good credit score empowers its holder:
- Easier approval of loans
Generally, an individual with a good credit score gets his loan approved and with lower interest rates.
- Better insurance rates
Aside from a few states (California, Maryland, and Hawii), a high credit score could allow individuals to enjoy lower insurance rates compared to their peers with bad credit scores.
- Better chance to get an apartment
Credit scores are a major factor in real estate and this extends to renting. Most landlords trust an individual with a high credit score to pay rent on time as opposed to someone with a bad score. Occasionally, even the rent can be offered at a lower rate due to a high credit score.
- Better credit card packages
A top notch credit score can get its holder a premium credit card with the interest rates far lower than norm. From the best rewards program, cash back, airline miles, to hotel accommodations, these are just some of the perks that can be enjoyed. And the fact is the exact opposite for people with bad credit scores.
Improving a credit score
A bad credit score does not mean the end of a person’s financial viability. It does however require an overhaul of the said person’s spending habits. Here are some great ways to improve a flagging credit score:
- Pay bills in a timely manner
- Pay off late bills
- Contact creditors if payment is becoming difficult and work out easier terms
- Manage debt by keeping balances low or pay it off entirely
- Manage credit cards wisely
- Do not close unused credit cards
- Do not open credit accounts one after the other
- Stick to a payment plan for your debt and bills
It is good to note that this is not a quick process. Fixing a bad credit score takes some time and it requires commitment. However, it is achievable. With a healthy sense of financial responsibility and commitment, turning a bad score to a better one is not impossible.