What’s in a Credit Score, and Why Does It Matter?

For many individuals, the whole concept of having credit and establishing a credit score can be confusing. However, several factors impact credit history and credit scores. For people without great credit, it can be a hassle trying to navigate through complicated information related to the world of credit. 

Fortunately, it’s easy to break down the basics of what is a credit score, credit reports, and why credit history matters.

What is a Credit Score?

A credit score is a 3-digit number assigned to a person’s credit report. It represents the determined creditworthiness of the individual based on their financial history. It relies on the information listed within the individual’s credit report as well as findings by the three main credit bureaus.

Credit scores fit into several groups: poor, fair, good, and excellent. Depending on how high a person’s score is, their credit group may qualify (or deny) them for future financial benefits. Good and excellent credit scores result in more approvals and better rates. On the other hand, fair and poor credit scores frequently get denied or have high interest rates.

How Does a Credit Score Work?

Three main credit bureaus are in charge of determining credit scores. TransUnion, Equifax, and Experian bureaus may come up with varying scores for one individual. However, the scores are relatively consistent.

An individual’s credit score differs due to the different scoring formulas each bureau uses.

When a person applies for a line of credit, he or she earns approval or denial based on their current credit score. If he or she is trying to establish credit for the first time, it’s wise to seek a beginner’s credit card with a low limit for the best chance of approval. 

Credit bureaus calculate scores based on an individual’s current level of debt and payment history. The number of open credit accounts, frequency of credit application, and length of history affect scores as well.

The more reliable the payment schedule and the longer the credit history, the higher the score. This holds true unless there are several negative accounts in an individual’s credit history.

How To Improve Your Credit Score

To improve a low credit score, individuals should take the following steps to start repairing credit:

• Pay bills without being late. Even a single late payment can drop an individual’s credit score a few points, so it’s important to be on time with bill payment.
  
• Keep low balances. If individuals have revolving credit records (like a credit card), it’s important to keep the balances low or pay them off completely each month.
  
• Use credit-improving programs. There are several apps and tools designed to improve credit scores. By using tools like ExperianBoost, individuals can improve their scores by paying for utilities on time.
  
• Don’t apply for credit lines too often. Opening a new line of credit usually requires a hard inquiry on your credit report. This can drop scores a few points, so it’s important to only apply for credit lines as needed.
  
• Check your credit report for inaccurate information. Though credit-reporting agencies are generally accurate, mistakes can occur. Should an individual find inaccurate information on a credit report, they should immediately dispute it.

For Individuals with NO Credit

There are solutions available for individuals who have low scores due to having little or no established credit.

By applying for a small line of credit for beginners and making on-time payments, individuals can work on building credit. Try seeking a credit card that’s designed for people who are trying to build their credit scores for the first time. Most credit companies have these card types available.

Benefits of Having Good Credit 

When an individual has achieved a credit score that is above or near 700, an array of financial benefits can await them. People with high credit scores tend to get much better rates on insurance, mortgages, and future lines of credit.

High credit scores mean that financial institutions deem a person as trustworthy and reliable with credit. That said, these individuals receive much fairer interest rates so that repayment is more affordable.

When an individual has suddenly improved their credit score a great deal, it’s a good idea to seek better rates when it comes to services they already use. This may include a better life or car insurance rate or lower interest rates for credit cards. If the individual seeks to refinance their home, it may be a significant benefit that results in much lower mortgage payments.

By keeping a decent credit score, individuals can qualify for great rates so they’re not overpaying for necessary items. Paying bills on time and monitoring your credit report can benefit you long-term and help you get approved for larger credit lines in the future.