A credit score is one of the most important financial tools you have, and it is the best way for lenders to know what you bring to the table as a borrower. Are you likely to pay your bills on time? Do you have a lot of debt? You want to pay close attention to this numerical representation of your credit history as you build your financial well-being.

Introduction to Credit Scores

Your credit score is a number that typically ranges from 300 to 850, and the higher it is, the better. Lenders use your credit score to determine if they should lend to you and to determine what level of risk you are to them.

What Is a Credit Score?

Credit scores are a type of predictive tool. Companies, like banks, credit unions, and credit card lenders, use them to predict what your borrowing behavior may be like down the road. It is based on the premise that people will follow the same types of credit patterns they have in the past in the future. A person with a history of making late payments in the past is more likely to make late payments in the future, for example.

Credit scores stem from the data compiled in your credit report. Most people have three credit reports, one from each credit bureau, Transunion, Equifax, and Experian. These organizations collect your data from lenders, including credit card companies, mortgage, auto loan lenders, etc. Then, a numerical figure is calculated using that data. The more positive aspects of your credit report, the higher your credit score will be.

Why Is a Credit Score Important?

Credit scores are critically important for many reasons. Most importantly, lenders use them to make lending decisions. Every time you want to borrow money to buy a home or car, open a new credit card, or consolidate your debts, it is your credit score that lenders will use to make that decision, at least in part.

Credit scores are also important for other reasons. For example, if you want to rent an apartment, the landlord may use your credit score to provide insight into what type of tenant you will be. Some employers can use credit scores to determine if you are a safe choice for a job, and insurance companies can also use this information to determine how much risk you present to them.

The higher your credit score, the better. It’s not just because a higher score helps you qualify for a loan but also impacts the loan terms. For example, if you have an excellent credit score, you may be able to obtain a loan with a lower interest rate. That means you pay less to borrow money, which means you will save money in the long term when borrowing.

Factors That Affect Credit Scores

As important as credit scores are, they do not stay the same over time. In many ways, you can change your credit score over time with good financial habits. The most essential factors in determining your credit score may include the following:

• Whether you pay your bills on time
• The amount of debt you have
• The type of debt you have, such as secured and unsecured loans
• Recency and frequency of new credit applications
• How long you’ve used credit

How to Check Your Credit Score

You must use one of several methods to determine your credit score. Under U.S. law, you have the right to information about what is being reported about you by the credit bureaus. That is why you have access to a free copy of your credit report once every 12 months from each credit bureau. However, that report does not always offer your credit score.

You also have multiple credit scores based on different algorithms and terms. If you want to learn your credit score, there are several places you can check.

• Some credit card companies provide their customers with credit scores. You will be able to view yours when you log into your account.
• There are free services that offer credit score information. These may be accurate but could be less accurate than others.
• Some banks also give you access to your credit score at no charge.

You do not want to pull multiple credit report copies, though. Do not apply for a loan to learn your score, as that can create a hard inquiry, a negative mark, on your credit report.

How to Improve Your Credit Score

Your credit score is constantly changing, and that’s a good thing. It means there’s always room for improvement. Some ways you can work to improve your credit score include:

• Make payments on time every single month. Set up automatic payments to make sure that happens.
• Don’t apply for too many loans in a short amount of time. Aim for no more than one application every six months.
• Use credit but keep your credit card balances as low as possible.
• Use different types of credit, like secured car loans and unsecured credit cards.
• Keep your credit open. Avoid closing accounts, especially older ones.

Building your credit score is a process that works over time. With consistency, you should be able to see your score rise over time.