March is National Credit Education Month which means there is no better time to educate yourself about the importance of understanding your credit score. Your credit report and credit score may not seem significant on a day-to-day basis. But together, they’re one of the most influential parts of your financial life, determining what you pay when you borrow money and if you’re able to borrow at all.
If you plan to buy a car with a loan or a home with a mortgage, for example, your credit report and credit score are critical. Here’s a look at how they work and what you can do to improve your credit over time.
Your credit report is like your high school transcript, but instead of tracking your grades from class, it tracks all of your borrowing and credit activity. Three big companies, Experian, TransUnion, and Equifax, are responsible for collecting all of that data and compiling a credit report for nearly every adult in the United States.
When you apply for new credit, open a loan or credit account, or make a payment, it’s all tracked on your credit report. On-time payments reflect positively, while late and missed payments make you a less desirable borrower.
Banks, credit card companies, and other lenders use your credit report when deciding whether or not to approve your application. You can get a copy of your credit report for free by law at AnnualCreditReport.com. Some other sites and apps offer free versions of your credit report as well.
Thinking back to high school, your grade point average (GPA) is a simple number that tells colleges and employers how well a student did in their classes. Your credit score is similar in that it summarizes all of your credit report details in a single number.
The most popular credit score is the FICO model, though the VantageScore model is also widely used. FICO scores range from 300 to 850, with higher scores indicating you’re more likely to pay back a loan as agreed and lower scores showing a higher risk of late and missed payments.
Your credit score is also a major factor in loan and c-bottomredit card approvals. Once approved, your credit score may also be used to determine your interest rate. Those with a lower score tend to pay higher rates, while those with top credit scores pay the lowest rates.
Under the FICO credit scoring system, five main components make up your credit score:
If you have no credit or bad credit, you may want to establish a good credit score to access the best borrowing products and rates in the future. That’s a great goal. Here are some steps to follow to build your credit.
Personal finance is a lifetime pursuit. Just as it’s wise to plan for long-term savings, retirement investments, and other major financial goals, it’s essential to track and build your credit. For example, a good credit score can save you tens of thousands of dollars on a mortgage over time or could be what decides if you can buy a home at all.
When you work hard to build your credit, it should help your financial situation in the long run. If you don’t know where you stand, start with your free credit report today.
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