What Are Credit Scores, And Why Are They Important?
What are credit scores? Well, the term refers to a three-digit number calculated and based on your credit reports. It summarises your history with credit and demonstrates how responsible you are with debt. The higher your score, the lower risk you are to potential lenders.
Why Are Credit Scores Important?
Credit providers or lenders use your credit score to determine two things, namely:
- Whether you qualify for a loan
- How much interest you should pay on a loan
What Does Your Credit Score Mean?
- 650+
Excellent credit. You should obtain credit quickly, receiving very low interest rates.
- 600-650
Very good credit. You will get the best loan offers at a good rate.
- 550-600
Good credit. You will receive good loan program offers at a fair rate.
- 490-550
Sub-par credit. You may struggle to get a loan and pay high interest rates.
- 490 and below
Poor credit. You may not qualify for a loan and seek to improve your credit score.
Establishing a Credit Score
Your credit score is never a fixed number. It varies according to the scoring systems of different financial institutions. Each institution has its own way of calculating a credit score, but they all rely on one thing, which is a credit record. No credit record equals no credit score because lenders won’t give you a loan without a means of determining your risk level.
Essentially, you must have a credit score to qualify for credit, so you should take on small loans and those easy to qualify for. If you’re responsible when paying these back, you’ll establish a good credit score.
How to Improve Your Credit Score
- Always pay your accounts in full and on time
- Only use credit when necessary and without going over your credit limits.
- Keep your credit card debt as low as possible.
- Avoid owing more than 30% of your income on debt
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