What is a credit score and why should you build your credit score?
A credit score determines a consumer’s creditworthiness and is based on credit history, including the number of open accounts, debt levels, and repayment history. Typically, it’s a number between 300 and 900, and the higher the score, the better your creditworthiness. Credit scores are calculated using information in your credit report, which can include your payment history, the amount of debt you have and the length of your credit history.
What is a good credit score?
Why do credit scores matter?
Higher credit scores can translate into more favorable terms when securing a loan, such as lower payments and interest rates. Depending on the situation, some lenders might place more emphasis on other factors such as income or specific aspects of your credit score such as your payment history.
Some lending institutions charge higher interest rates on subprime mortgages due to the increased risk of late payments. They may also require shorter payment terms or a co-signer with a higher credit score.
Certain businesses may even require your credit report to consider you for a job, offer you a promotion, and provide you with insurance. Therefore, it’s important to start learning about your credit score and improving it as soon as possible.
How can you build your credit score?
Credit scoring models use your credit history to determine your score. Therefore, to start building your credit score you must open a credit account for at least six months or hold an account that has been active for the past six months.
At first, apply for just one manageable card in order to keep track of your credit history. If you’re a student, many financial institutions offer student accounts with lower credit limits and interest rates, which are a great place to start.
How can you improve your credit score?
There are many ways to improve your credit score including:
- Paying your bills on time for at least 6 months to see a noticeable difference in your credit score.
- Upping your credit line by inquiring at your bank about a credit increase. Try not to reach this limit in order to maintain a lower credit utilization rate.
- Don’t close a credit card account. Instead, stop using it if you no longer need a certain credit card.
- Apply for credit only when needed as opening several new accounts during a short time period could lead to a large drop in your score.
- Use credit wisely and don’t go over your limit as borrowing more than the authorized amount can lower your score.
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