A Look at Why Your Credit Score Matters and How to Raise It

Everywhere you look, your credit score matters. You want to have a score that’s at least in the good range. While your credit score can determine whether you can qualify for a new credit card, it means a lot more than just that. It can impact whether you can rent an apartment or even if you can secure a job. There are a few things to know about credit scores.

Why Does Your Credit Score Matter?

The better your credit score, the more likely you are to be able to qualify to get lots of things. Those things include credit cards, loans, cell phone plans, and even apartments. You can also get considerably lower interest rates and better terms on loans and credit cards with a higher credit score. The opposite is true of a bad credit score: you will have to deal with higher interest rates and not-so-good terms on loans or credit cards.

Credit scores are considered to be in the “good” range once they are around 680. However, if your score is only fair, bad, or poor, you would have to pay more toward an auto loan or mortgage compared with someone with a good or excellent score. For example, if your credit score was around 620, you would have to pay around $5,000 more on an auto loan compared with a person who has a score of 760. These numbers can really add up, which means you should try to work on improving your credit score if it’s considered less than good.

What Determines Your Credit Score?

Your credit score is determined by a variety of factors. It reflects your credit history and tells prospective lenders and creditors whether you are a good risk for a loan or credit card. If you have a low credit score, it tells lenders that you may be a bad risk. Your credit might be bad due to improper use of a credit card, late payments, or even missed payments.

FICO credit scores are used by around 90 percent of businesses in the United States to determine how much credit should be offered to consumers. It also determines what their interest rate should be on a credit card. FICO uses five factors to determine a credit score, including the following:

• Payment history makes up 35 percent of your credit score. If you pay your balances timely and pay them in full, your credit score will be better.
• Amounts owed make up 30 percent of a credit score. When using a credit card, you should aim to stay within 30 percent or less of the total credit limit. The lower your total credit utilization, the better your score. However, if you spend more than 30 percent of your total credit limit regularly, it can adversely affect your credit score.
• Credit history length makes up 15 percent of your credit score. It’s better for you when you have had an account longer.
• Credit mix makes up 10 percent of your credit score. If you have a combination of credit cards and loans, it’s viewed as a good thing. However, avoid taking out additional loans or credit cards unless you truly need them.
• New credit makes up 10 percent of your credit score. While it’s fine to open a new account on occasion, applying for multiple credit cards or loans in a short period of time can cause your credit score to take a nosedive.

Over time, it’s normal for your credit score to go up and down. It can change a little or a lot depending on how you use your credit cards, how much you spend, how long it takes you to pay your balances, and how much you pay when you owe. Your repayments toward a mortgage and loans can also play a part in your credit score.

How to Improve Your Credit Score

If your credit score is under 680, you will want to improve it. There are things you can do to raise your score. They include the following:

• Check your credit report: You can obtain a free copy of your credit report annually from each of the major credit bureaus. It’s important to thoroughly check your reports for errors and report any errors you spot so they can be fixed.
• Make timely payments: Keeping track of dates when payments are due is wise. You may even want to set up reminders so you can pay on time.
• Pay more than once: If you can manage it, pay bills more than once per billing cycle in a single month. It can lower your credit utilization, which can also improve your credit score.
• Contact creditors: If you cannot afford to make a payment or if you miss a payment deadline, contact your creditors to see if they would be willing to work with you on a way you can repay.
• Be careful when applying for new credit: If you must open a new account, limit it to one at a time and avoid opening multiple accounts in a short period.
• Don’t close unused credit accounts: Credit age matters, which means you should avoid closing older credit accounts, even if you haven’t used them in a long time.
• Have a credit mix: Having a mix of credit cards and loans and making timely payments on them can help improve your credit score.

Being responsible with your credit can help you to raise your credit score. Do your part to maintain a good score over time.