Your credit score, one number that has more influence over your financial well-being than almost any other factor. For something that carries this much weight, most people don’t know exactly what it is, and how it is calculated. We’re here to dispel the myths and help you work your way towards financial freedom.
What is a Credit Score?
A three-digit number used to express the creditworthiness of an individual. This number is based on a level analysis of the individual’s credit files. Lenders use this score to evaluate the potential risk on the loan. This score can also decide who qualifies, the potential interest rate, and what the credit limits might be. These scores are calculated by aggregating all of the data from your various financial obligations. One thing to keep in mind is that not all lenders or financial institutions use the same algorithm to arrive at their scores. Some variables that affect your score are the payment history on loans and credit cards, how much revolving credit you use, length of time you have had the lines of credit open, and how often you apply for new lines of credit.
Where Can You Find Your Credit Score?
The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies– Equifax, Experian, and TransUnion– to provide you with a free copy of your credit report, at your request, once every 12 months. *Beware– only one website is authorized by the Federal Trade Commission to provide free credit reports with no strings attached. You can order your free report here. Although not all lenders use the same algorithm to arrive at their scores, the changes you can make to improve your credit score are universal.
How to Improve Your Credit Score
When you check your scores online, you will be provided with personalized information on what might have adversely affected your score. With that said, here are 3 great ways to bump your score.
- Pay all of your bills on time! This one seems obvious, but the easiest way to stabilize and then build up your score. According to FICO, your payment history comprises 35% of your total credit score and the single most important element in calculating scores.
- Keep an eye on your credit utilization ratio. This is the percentage of available credit that you use. Some people claim that 30% credit utilization is the magic number. FICO says that the people with the best credit scores typically keep their ratio under 6%. So keep those balances low.
- Take advantage of Experian Boost. Experian Boost is a great new tool that enables you to instantly improve your credit score by adding your utility and phone bills to your report.
There’s nothing more disheartening than checking your report online and seeing a number that would make any aspiring future business or homeowner cringe. But it’s entirely possible to take the simple steps outlined above to slowly chip away at those negative factors and build newfound financial prosperity.