Understanding and Improving Your Credit Score
A low credit score can cost you thousands of dollars.
According to a recent industry survey, most Americans know that credit scores have a big effect on their finances — but only 21% realize that a low credit score can mean paying higher interest rates.
So today, we’re giving you everything you need to know about credit scores.
What is a credit score?
A credit score is a number that tells financial institutions how likely you are to pay a loan or a bill.
Most companies use the Vantage or FICO scores calculated by credit bureaus. These scores typically range from 300 to 850 — the higher the score, the more likely you are to pay your bills.
If you don’t know your score, you can check it for free on Status Money by linking your credit file.
How are credit scores calculated?
Credit scores are like the GPA you get at school — they summarize your performance in a few subjects. These subjects are:
- On-Time Payment History
- Total Debts Owed
- Percent of Credit Used
- Age of Credit History
- Credit Applications (Inquiries) in Last Year
- Diversity of Credit Types
The banks and companies you borrow from send this information to one or more of the credit bureaus (TransUnion, Experian, and Equifax), who summarize it and calculate your score.
How are credit scores used?
Banks get your credit score from a credit bureau and use it (among other things) to decide whether to approve your application for a new loan, or to increase or reduce the amount you can borrow. They also use your credit score to determine the interest they will charge you.
Why are credit scores important?
Credit scores can have a significant impact on your life. A low credit score can cause banks to decline your loan applications or charge you thousands of dollars more in interest. It can even cause landlords to reject a rental application and stop telecom companies from giving you a cell-phone plan.
How can I improve my score?
1. Track it: The most important thing you can do to improve your credit score is to start tracking it. Status Money helps you track and compare your score for free and sends you email alerts when it changes.
2. Monitor your accounts: Identity thieves can open accounts and borrow money in your name. To protect yourself against this fraud, regularly review the accounts on your credit report. Status Money also helps you do this by sending you email alerts when new accounts are reported to the credit bureau in your name.
3. Pay your bills on time: Payment history has a big impact on your score, so always pay at least the minimum amount due on time.
4. Use less than half of your available credit:Banks don’t report your spending and payment amounts to the credit bureaus — so the bureaus look at how much of your available credit you’ve used up to evaluate your score. Whether or not you pay your credit card balance in full every month, try to keep your balance under half of your available credit.
5. Don’t apply for too many loans: Every time you apply for credit, an inquiry is sent to the credit bureau. A high number of inquiries could look like a sign of financial distress and cause your score to drop.
You are now a credit score guru! Stay on top of your score by checking it on Status Money.
