How Important Is Your Credit Score?

Your credit score plays an important role – be it in getting approved for a mortgage at a low rate, securing a lower interest rate on your credit card, or getting affordable premium quotes for insurance plans. Your credit score can either allow you to save a substantial amount of money by helping you avail discounted deals and reduced interest rates or cause a significant increase in your out of pocket expenses.

Credit Score Vs. Credit Report – Are They The Same?

Often used interchangeably, your credit score and credit report are two different things. Your credit report is a comprehensive record of any credit you may have borrowed, your repayment history, and how much money you can borrow in the future. The information that makes up your credit report remains primarily with Equifax, Experian, and TransUnion, which are credit bureaus. The credit report typically consists of the following:

  • A list of all loan and debts you’ve taken and your repayment history
  • Bills that you defaulted on, which then had to be referred to a collection agency
  • Information about bankruptcies or tax liens (public-record information) that is linked to you
  • Credit score inquiries and whether the inquiring party offered you credit

Your credit score, on the other hand, is a three-digit number that can range anywhere between 300 and 850, and is determined based on the details in your credit report.

What Is Your Credit Score Based On?

Your credit score is based on the following factors:

  1. Payment history: If you’ve defaulted on your credit repayments in the past, your credit score would likely have taken a hit. To improve your credit score, ensure you pay your bills on time.
  2. Total debts: The total amount of credit you owe, which comprises loans and credit card payments, has an impact on your credit score. If you’ve maximized your credit card limits and have taken out multiple loans, your credit score will be negatively affected.
  3. Available credit and credit utilization ratio: Your credit utilization ratio measures how much credit you are currently using based on the total credit you have available. If your credit balance is lower than your credit limit, your credit score will increase.
  4. Recent credit applications: If you’ve opened multiple credit accounts recently, your credit score may have suffered since this could indicate that you’re going through financial distress and are less likely to make repayments on time.
  5. Types of credit you use: If you have applied for various types of credit & have a good credit mix, including credit cards, home mortgage, auto loans, your credit score can significantly improve.
  6. Credit usage history: Your credit score is also affected by your credit usage history. If you’ve had a long history of keeping your card balances to a minimum and have managed to repay all your debts on time, without any defaults, your credit score will increase.

The Final Word

Given how important credit scores have become, it really does pay to understand how it works and do what’s necessary to build your score. Keep in mind, the higher the credit score, the more financing options you will have.

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