Nowadays finding your credit score is easier than it’s ever been. You can find it when you log into your bank account, on budgeting apps, through email updates from your bank and more. But for many, credit scores can be confusing and our advisors are here to help clarify your financial inquiries. We’re answering some basic questions to help you better understand how a credit score is calculated and the best way to improve your score.
What is a credit score and why is it important?
Lenders look at your credit score to determine how risky a borrower you are. If your credit score is high, it shows lenders that you are a low-risk borrower. This increases your likelihood of being approved for a loan, and you’ll likely be able to borrow more money or receive a lower interest rate on it.
On the other hand, if your credit score is low, it shows lenders you are a high-risk borrower and you likely won’t get approved for a loan. If you are a high-risk borrower but do get approved, your interest rate may be high or the lender won’t approve you for the total loan amount you are hoping to receive.
Having a good credit score is important for many reasons and can be incredibly beneficial. Whether you are applying for a mortgage, an auto loan, a credit card or whatever else it might be, you want to make sure you have a high credit score to improve your probability of being approved. Keep reading to see other advantages of having and maintaining a good credit score.
Advantages of Having a Good Credit Score
Apart from the benefits mentioned above, there are other benefits of having a good credit score. Many institutions can see your credit score, and having a high credit score can reflect positively on you and your trustworthiness.
For example, some apartments don’t require a security deposit if a potential tenant’s credit score is above a certain level, meaning you could potentially save hundreds of dollars upfront that you may not get back at the end of your leasing period.
Employers and insurance companies can also see your credit scores, which helps them determine how good you are at managing money. Even banks may look at your credit score if you’re trying to open an account in order to determine your potential to overdraw money from your account.
How is a credit score calculated?
There are 5 main things creditors look at when determining a credit score, and you can use them to calculate your own score:
- Payment history - Are you making payments? Are you consistent and on time with those payments? This category is extremely significant as it makes up 35% of your credit score.
- How much money you owe - Are you using all of your available credit, or are you only using a portion of that and paying it off? 30% of your score is based on your credit availability and usage.
- Credit history - How long have you had a credit history? The longer you’ve been using credit, the more data creditors have to back up your credit score. This accounts for 15% of your calculated credit score.
- Credit type - What type of credit do you have? Lenders want to know if it’s revolving credit, installment loans or new credit. This makes up 10% of your credit score.
- How much credit you’ve received in the last 12 months - The last 10% of your credit score is calculated based on how much credit you’re taking out or how many credit cards you’re opening. Frequently adding more credit cards is a sign of a risky borrower.
How long does it take to improve your credit score?
The amount of time it takes to improve your credit score can vary based on the reason for needing to improve your credit score in the first place. If you don’t yet have a robust credit history or you’re in the early stages of building your credit, raising your score can take just a few months. However, if you were late on payments, went through a foreclosure on your home or filed for bankruptcy, then it can take anywhere from 2 to 10 years to improve your credit score.
There are several things you can do in the short-term to try and improve your credit score:
- Make credit card payments on time. When you’re not making payments, credit cards can be bad for your score. If you’re just starting your credit journey, this is the perfect way to show lenders you can be consistent in making payments.
- Hold old credit accounts. A long history of credit is correlated to how old your account is, so closing an old account and opening a new one can actually hurt your score.
- Ensure information from old credit reports is accurate. In some cases misinformation can be challenged and removed from an old credit report, thus improving your score.
Get Help With Credit at Compass Financial Services in Des Moines
If your credit score is low and you’re looking to improve it, or if you’re ready to get started on your credit building journey, don’t wait! Get started today with our hourly financial planning services. Our financial advisors in Des Moines put an emphasis on listening to clients and creating a financial plan that is unique to their individual circumstances, financial needs and financial goals. Reach out to our Des Moines financial advisors at Compass Financial today. We look forward to working with you to improve your credit score.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.