The other day, my daughter asked me about credit scores—here is what I told her:
It is usually wise to pay cash for purchases because it indicates that you have been prudent with your finances and have budgeted for the expense. However, sometimes borrowing becomes necessary for larger purchases, such as buying a home.
When you borrow money, lenders want to know how likely you are to repay a loan on time—this is where credit scores come in.
- A credit score is a number that represents the likelihood that you’ll repay the loan as agreed. It is calculated based on your credit history, which includes information such as your payment history, credit utilization ratio, and length of credit history.
- Lenders use credit scores to decide whether to approve you for a loan and at what interest rate. A good credit score can help you qualify for a lower interest rate, saving you money over the life of the loan.
WHAT IS CONSIDERED A GOOD CREDIT SCORE?
Credit scores range from 300 to 850. A good credit score is generally considered to be 700 or above. However, different lenders may have their criteria for what they think is a good credit score.
Here is a simple breakdown of credit score ranges:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
BENEFITS OF HAVING A GOOD CREDIT SCORE
There are many benefits to having a good credit score, including:
- You get lower interest rates on loans and credit cards,
- You’re more likely to be approved for loans and credit cards,
- You get better terms on loans and credit cards,
- Your insurance premiums may be lower and
- It is easier to get approved for rental housing and utilities.
HOW TO IMPROVE YOUR CREDIT SCORE
As I previously stated, credit scores are calculated based on your credit history. So, if your credit score is not as good as you would like, there are things you can do to improve it.
- Make all your payments on time and in full each month.
- Keep your credit utilization ratio low—using less than 30% of your available credit.
- Open new accounts sparingly.
- Keep your credit history long and positive.
Building a good credit score takes time, but it is worth it in the long run. By following the tips above, you can improve your credit score and enjoy the many benefits that come with it.
