For many, credit scores can seem intimidating. After all, a lot of mystery seems to surround them—from who figures this number out to how do they do it. However, credit scores can be relatively simple to understand and very valuable to take advantage of once you do.
What Is A Credit Score, Anyway?
Credit scores are three-digit numbers that determine someone's creditworthiness—basically, whether or not someone can be trusted to repay their debts. The most common credit score is the FICO® score, which ranges from 300 to 850. Your score will be determined by five factors: your payment history (35% of your score), how much you owe (30%), the length of your credit history (15%), the type of credit you have (10%), and the amount of new credit your have (10%).
Businesses and organizations (like banks) look at someone's credit score to determine whether to lend them money and at what interest rate. Keep track of your number and keep it up because a credit score affects many different (often essential) parts of your life—like securing loans for a home, car, or small business.
Even if you're years away from such a purchase, you should still care about your score now. That's because the longer you have a history of responsible credit use, the better. Also, increasing your score takes time. If you need to bring your number up, you don't want to wait until right before you apply for a mortgage.
How To Find Your Number
In the United States, you are entitled by law to a free credit report from each of the three major consumer reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. You can pull these reports at AnnualCreditReport.com. Your credit report will not include your credit score, but you can get a good idea of what shape your credit is in by reading your report.
There are several ways, many of them online, to find your actual number. The score you find will most likely be your FICO score; however, that number can vary from agency to agency—and lenders may use their own ways to measures your creditworthiness. That’s why you should keep good credit habits in general, even if your score or credit report look OK.
Improving Your Credit Score
If your score isn't as high as you were hoping, don't worry: There are ways to raise that number. (Which is also why you should check your credit score every year.) Luckily, your present use of credit often has more of an impact on your score than your past use, so bettering your credit habits right now can offset any past problems.
One of the most important things to do is pay off your debts. Regularly working to pay off any installment loans you've received—like student loans, car, or mortgage payments—will help your score. Paying off credit card debt will also help to bump up your score, so work to keep a big gap between the amount of credit you're allowed and the amount of credit you're using.
However, you don't want to pay off a debt all at once; because the organizations that calculate your credit like to see evidence of steady income, it's better to pay any debts off gradually. Similarly, while it may seem like a good idea to close an old credit card account—cutting down on unused cards is responsible, right?—doing so will actually hurt your score. So long as you use them periodically and pay them off in full, keeping your cards around can help you raise your score in the future, as it establishes a longer history of handling an account.
You can also have a weak credit score if you don't have a credit card at all, because there's no positive history of maintaining a balance to keep your score in the higher range. If you don't have a credit card, think about getting one to use for a few purchases each month, like groceries, that you can easily pay off on time to establish a track record of responsibility. And if you already use a credit card this way, but you're still not happy with the number, think about applying for an additional card.
Don't Be Credit Invisible
If you don't have a credit card or any installment loans, you likely have no positive history of maintaining a balance or paying off your debts. This could leave you with a weak or nonexistent credit score (the latter is known as being "credit invisible"). So remember: When it comes to credit, ignorance is not bliss.
And if you already use a credit card this way, but you're still not happy with the number, think about applying for an additional card. If you don't want a credit card at all, you can take other steps to show you're responsible—like reporting your rent payments to the consumer reporting agencies.