Credit scores are always brought up in all financially related topics, and this is for a good reason. But more than determining the loans you are qualified for and how much your interest rate payments will be, your credit score can do so much more than these.
Insurers refer to credit scores when setting premiums for coverage for home and car owners. Landlords also use credit scores to identify the right tenants for their properties. Credit scores also help identify the best candidates for phone plans and who are required to put down bigger deposits for utilities.
To put it simply, your credit score is a financial tool you can never do without.
You Need a Credit Score for a Good Reason
Lenders use credit scores to determine if someone is creditworthy or not. It is your credit score that determines if you can be approved for car loans, credit cards, mortgages, and other loans. It also influences the terms and interest rates that lenders may assign to you once your application has been approved.
Landlords, insurance providers, and even employers may check your credit score when applying for a new policy or an apartment. In cases like these, a good credit score will signify your sense of responsibility and overall trustworthiness.
How Does Your Credit Score Work?
VantageScore and FICO are the two primary systems for credit scoring. The companies calculate credit scores using information from an individual’s credit report. The information comes from the three main credit bureaus – TransUnion, Experian, and Equifax.
This is the reason why your credit score often varies across different scoring versions and models. Lenders decide on the credit scores they will use to determine if you are creditworthy or not. Some scores may also be specific to the type of loan or industry.
There are generally five key factors that determine a person’s credit score. These are recent activity, credit mix, age of credit history, payment history, and balances owed. Out of these five, your balances owed and payment history have the most impact on your FICO credit score.
How to Maintain and Defend Your Credit Score
Regular monitoring of your credit report for potential fraud or mistakes is the first step to defending and maintaining your score.
The Fair Credit Reporting Act states that you are allowed to get a copy of your credit report every year from the three different credit bureaus. Credit monitoring services also charge a fee to help you monitor your credit automatically.
Aside from the identification of errors, regular checking of your credit reports can help prevent identity theft. Suspicious inquiries, unauthorized charges, or unrecognized accounts are all possible signs of identity theft best caught and addressed sooner than later.
Develop Good Habits to Grow Your Credit
It doesn’t matter if you have good credit, poor credit, or no credit history at all, it is important to practice good credit habits to maintain or improve your credit score over time. You can get the best results by making full payments of your balances and making on-time payments every month.
Try to maintain a low credit utilization ratio of less than 30%. Don’t close old credit cards or apply for several loans or credit accounts within a short period. Check your credit report and score frequently to catch any inconsistencies or issues before they turn into serious problems.
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