How to check your credit score?
Everything you need to know about credit score, how to check it, and how to improve it.
What Is a Credit Score?
A credit score is a number used to determine your credit risk or the probability of repaying a loan on time. It is a number that lenders use to determine your creditworthiness.
Credit scores are based on a variety of personal financial data. Your credit scores can affect whether or not you are approved for a mortgage, car loan, personal loan, credit card, or other types of credit. Your credit scores will also help determine the interest rate and terms you’re given if you’re accepted.
Key Points
- Credit scores are a financial tool but whether they’re a lever or a hammer depends on how good they are.
- The longer your history of making timely payments, the higher your score will be.
- Lenders use credit scoring in risk-based pricing in which the terms of a loan, including the interest rate, offered to borrowers are based on the probability of repayment.
How Do Credit Scores Work?
Your credit score has a significant effect on your financial life. It has a big impact on whether or not a lender can offer you credit. Banks and credit unions want to know how likely you are to default on your loan, so they look for clues in your borrowing history. They can tell lenders whether you still pay your bills on time or whether you pay your car loan or credit card bills late on a regular basis. When you apply for loans or credit cards, lenders rely on these scores. You may not be able to get the loan if your scores are too low.
Why Is Credit Score Important?
Your credit scores influence far more than the types of loans you can get and the interest rates you pay. When you apply for credit, the first thing that is likely to be checked is your credit score. In other words, credit scores are a financial tool, but their effectiveness as just a lever or a hammer depends on how good they are. Your credit score will follow you for the remainder of your life and will play a large part in many big financial decisions. Many people believe that a credit score is only essential when applying for a loan or credit card, but it is far more than that. Some of the most critical aspects of your financial life are your credit score and underlying history.
Considering how important credit scores are to your overall financial well-being, it’s wise to do everything you can to ensure yours are as good as possible.
How Are Credit Scores Calculated?
You don’t have just one credit score. Credit scores may vary due to several reasons, including the company providing the score, the data on which the score is based, and the method of calculating the score.
In general, credit scores are calculated based on the following:
Payment History
Payment history accounts for 35% of your total score. This shows if you pay your bills on time, how much you skip payments, how many days past due you pay your bills, and how recently you have missed payments. Previous bankruptcies, collections, and delinquencies are also taken into consideration. When you miss a payment, it harms your credit score.
Amount Owed
The amount you actually owe compared to the credit you have available is the second most significant consideration. Your credit score is 30% determined by how much money you owe on loans and credit cards. This component of your credit score reflects on your existing debt, the total amount you owe, the number and types of accounts you have, and the percentage of the money owed relative to the amount of credit you have.
Length of Credit History
15% of your credit score is determined by the length of your credit history. The more open and in good standing credit accounts you have, the better. It might appear wise to stop applying for loans and racking up debt. However, if lenders have no credit background to check, this may actually hurt your score.
Types of Accounts You Have
10% of your overall score is determined by the type of accounts you have. It’s likely that holding a variety of accounts, such as instalment loans, home loans, and retail and credit cards, would help you increase your credit score.
Credit Mix
Recent credit activity makes up the final 10%. Lenders prefer to see a balanced credit mix that shows the ability to handle various forms of credit. If you’ve recently opened a lot of accounts, this could indicate financial difficulty and lower your score. If you have got the same loans or credit cards for a long time and pay them on time, or even if you had payment issues, your credit score would increase with time.
What Are the Advantages of Having a Good Credit Score?
When you have a good credit score, you can enjoy many benefits that those with bad credit scores can’t have. If you have a good credit score, you are entitled to the following benefits:
Interest Rates
With a good credit score, you get lower interest rates and better terms on credit products. One of the benefits of having a good credit score is that banks can give you lower-interest loans and credit cards. Such incentives include a drop in the processing fee and the prospect of receiving a greater loan amount.
Better Chance for Credit Card and Loan Approval
Borrowers with a poor credit background are also unable to apply for a new credit card or loan. Banks and lenders are more likely to accept loan applications if you have good credit. In other terms, you can confidently apply for a loan or a credit card with a good credit score.
Access to the Best Credit Card Rewards
You will also get access to the most rewarding credit cards on the market if you have a good credit score. These can include cash back, travel points, and other perks.
Get Approved For a Higher Credit Limit On Your Credit Card
You can get approved for a higher credit limit on your credit card if you have a good credit score. Because of your proven creditworthiness, creditors are more likely to lend you more money.
Eligibility For a Pre-Approved Loan
Pre-approved loan deals are available to borrowers with good credit scores. In most cases, banks can make a pre-approved loan deal to current customers with a clear credit background.
A good credit score can help you get the loan you need in a quick and easy way.
How Can You Check Your Credit Scores?
When you’re getting ready to apply for new loans, knowing what your credit scores mean and how they’re affected will help. You can check your credit score from many sources. Below are some ways you can check it:
- You can review your credit score for free on a number of websites. Just make sure to read the terms and conditions before signing up. Some free websites have educational scores to help you understand how you’re doing in terms of credit.
- Many credit card and car loan providers offer free credit scores that you can review by signing into your account online or receiving on your monthly statement.
- You can get assistance from a non-profit credit counsellor. Credit counsellors will often pull the scores for you for no charge and go over the information with you.
How Can You Improve Your Credit Scores?
If you have a low credit rating, there are several things you can do to improve it and have a better credit score.
Pay your bills on time
By paying all of your bills on time per month, you will have a favourable impact on this credit scoring factor. Late payments or settling an account for less than you promised will have a negative impact on your credit score.
Keep your credit utilisation low
Examine all of your credit card statements from the past 12 months to calculate your total credit usage level. Divide the monthly statement balances from all of your cards by 12. This is the total amount of credit you use per month, and those with the best credit scores often have very low credit usage levels.
Payoff Debts
Before applying for new credit, you should try to pay off any unpaid debt. Since you do have a lot of debt, banks will be afraid to lend you more money if you already have a lot of debt.