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Credit Score 101

Understanding and improving your credit

Part 8 | Reading Time: 4 minutes

Hey there! Have you ever heard about that mysterious number that has power over your financial life? Get ready to dive into the world of credit scores – those three-digit pals that play a massive role in all your economic ventures. Think of them as your financial report card, a numerical reflection of how well you handle borrowed cash. This blog will unravel the credit score mystery, helping you understand what it is, and uncover why it’s more important than you might think. So, grab a seat and embark on a journey to demystify the credit score game!

What is a credit score, and why is it important?

This can be a very overwhelming topic, so let’s start simple. Credit is like a cash advance from someone you know. In most cases, this is a bank lending you some money. A bank lends you that money to buy whatever you may need. What the bank is giving you to spend is credit. But remember, the bank is expecting you to pay that money back eventually.

That is where a credit score comes in. A credit score is a grade for how well you handle that money and whether you pay it back. It’s used by banks when you want to borrow money. The higher your score, the more trustworthy you are to the banks. It’s like a report card that shows lenders if you’re good at managing money. 

The most common occurrence of credit is through credit cards. A credit card is like a digital wallet that lets you buy things now and pay for them later. It’s a plastic card you use to borrow money from the bank or company that issued it. Instead of using real cash, you’re using the bank’s capital and promising to pay it back later, just like how we discussed credit earlier. Usually, this is paid in monthly installments. It is essential to mention that credit can also be affected by different types of loans like mortgages, student loan payments, and more.

You may wonder, “Why should I try to keep a good credit score?” Here are some reasons why.

Good credit score benefits

Lower interest rates

Lenders see you as less risky, offering you loans and credit cards with lower interest rates. This means you’ll pay less interest over time, saving you money in the long run.1

Easier loan approval

With a good credit score, you’re more likely to get approved for loans, whether for buying a car, getting a mortgage for a house, or financing needs.

Rental opportunities

When renting, landlords often check credit scores to assess a tenant’s financial responsibility. A good credit score might make it easier for you to secure a rental property.1

Employment opportunities

While not every employer will check credit scores, some positions that involve financial responsibilities might consider your credit history as part of the hiring process.2

Insurance premiums

In some cases, a good credit score can lead to lower insurance premiums, as insurers may view responsible financial behavior as an indicator of responsible everyday behavior.2

So, think of it as a trust rating for your financial responsibility! You may also wonder “how do I know if I have a good credit score and how can I improve it”? 

The number matters

Less than 630 = Poor

630-689 = Fair

690-719 = Good

More than 720 = Excellent3

How to view your credit score

You can visit a reporting agency’s website like Equifax, Experian, or TransUnion by creating an account, and they will show you your credit score and report. This can help you track your finances and identify any mistakes. Also, contrary to popular belief, checking your score doesn’t affect your credit.

How to improve your credit score

Pay bills on time and in full

Paying on time will increase your credit score. You may want to consider setting up a budget, automatic payments, or reminder alert to help you keep up with bills. And making at least the minimum payment on credit accounts—like your credit card—will keep your tabs current and in good standing. Did you know not paying your bills on time will cause them to appear on your credit record for up to 7 years, which is why paying it off promptly is so important.

Become an authorized user

If you have a loved one or someone you trust with a good credit score, some credit card companies will allow you to be added as an authorized user to their account. This allows you to make purchases. But the primary account holder is ultimately responsible for payments. And their responsible use can help build your credit and help your score rise. Sometimes, there needs to be a credit check, or you may have to apply to be an authorized user.4

Set up payment reminders

Be sure to keep note of payment deadlines for each bill in a planner or calendar and set up reminders online. Consistently paying your bills on time can raise your score within a few months.

Pay more than once in a billing cycle

If you can afford to, pay your bills every two weeks rather than once a month. This lowers your credit utilization and improves your score.4

Don't close unused credit card accounts

The age of your credit history matters, and a more extended history is better. If that credit card account is too tempting, try freezing the account instead of closing it. If you absolutely have to close credit accounts, close newer ones.5

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Resources

1 Dieker, Nicole. “Why Is Good Credit so Important?”  Bankrate, www.bankrate.com/personal-finance/credit/why-is-good-credit-so-important/. Accessed 15 Aug. 2023.
2 Gogol, Frank. “9 Incredible Benefits of Good Credit [2023].”   Stilt Blog, 9 Aug. 2023, www.stilt.com/blog/2018/08/benefits-of-good-credit/.
3 Barroso, Ammanda, and Bev O’Shea. “Guide to Understanding Credit Scores and Score Ranges.”  NerdWallet, www.nerdwallet.com/article/finance/credit-score-ranges-and-how-to-improve Accessed 15 Aug. 2023.
4 Barroso, Ammanda, and Bev O’Shea. “9 Ways to Build and Improve Your Credit Fast.”  NerdWallet, www.nerdwallet.com/article/finance/raise-credit-score-fastAccessed 15 Aug. 2023.
5 Copeland, Milvionne Chery. “Is It Better to Cancel Unused Credit Cards or Keep Them?”  WalletHub, 8 Dec. 2022,wallethub.com/answers/cc/should-i-close-unused-credit-cards-2140719689/#:~:text=It%20is%20better%20to%20keep,not%20have%20an%20annual%20feeAccessed 15 Aug. 2023.