Credit scores can have a significant impact on your financial life. They affect your ability to obtain loans, credit cards, and other financial products, and can even impact your ability to rent an apartment or get a job. Yet, many people don't fully understand what a credit score is, how it's calculated, and how to improve it. In this guide to financial literacy, we'll break down everything you need to know about credit scores.
What is a credit score?
A credit score is a number that represents your creditworthiness. It's used by lenders, credit card companies, and other financial institutions to determine the likelihood that you'll repay your debts on time. Your credit score is calculated based on several factors, including your payment history, the amount of debt you owe, the length of your credit history, and the types of credit you have.
How is a credit score calculated?
Credit scores are calculated by credit reporting agencies, such as Equifax, Experian, and TransUnion. They use a complex algorithm that takes into account the various factors that we mentioned above. The most common credit score used by lenders is the FICO score, which ranges from 300 to 850. The higher your credit score, the better your creditworthiness is considered.
How to improve your credit score
Improving your credit score takes time, but there are several steps you can take to start moving in the right direction:
Pay your bills on time: Payment history is the most important factor in determining your credit score. Pay your bills on time every month to avoid late fees and negative marks on your credit report.
Reduce your debt: The amount of debt you owe is another significant factor. Try to pay down your balances as much as possible, and avoid taking on new debt.
Check your credit report: Mistakes on your credit report can negatively impact your credit score. Regularly check your credit report for errors and dispute any inaccuracies.
Keep your credit accounts open: The length of your credit history is also important. Keep your credit accounts open, even if you don't use them regularly.
By following these steps, you can start to improve your credit score and become more financially literate.