If you’ve not yet applied for a car loan or a mortgage, you may not think much about your credit score. And you're not alone; more than half of all Americans haven’t looked at their credit score in the past year, 66 percent haven’t looked at their credit report, and 49 percent haven’t reviewed either, according to the 2015 Consumer Financial Literacy Survey from the National Foundation for Credit Counseling.
One in three who haven’t looked at their score say they skipped it because they didn’t know of any reason why they should review it. Yet your good credit score is a vital component of your overall financial well-being, even if you don’t intend to apply for credit any time soon. What’s more, regularly reviewing your credit report and score is one of the best ways to raise a credit score.
A credit score is a three-digit number that essentially tells creditors — and others, like insurers and employers — how well you manage credit and how likely you are to repay loans or credit cards. Different credit scoring agencies use complex algorithms to calculate your score based on information from your credit report. You can have many good credit scores from many different reporting agencies, but most people are familiar with the three large national credit bureaus: Equifax, Experian, and TransUnion.
While the law entitles you to receive a free copy of your credit score from each of the three national credit bureaus every 12 months, you may have to pay to view your credit score. However, some credit card companies and auto lenders have begun providing consumers with credit scores in their monthly statements. If you’ve been turned down for credit, the law requires the creditor to share with you the credit report and score on which they based their decision. A number of organizations also provide free educational scores that are very similar to an “official” score. The Consumer Financial Protection Bureau offers a report on the differences between educational scores and the ones lenders use.
Although each credit scoring agency has a slightly different method of calculation, credit scores typically range from 301 to 850. Any score higher than 750 is considered excellent, and you’ll likely be able to secure the credit you want at the most favorable rates available. Scores between 700 and 749 can be considered good credit scores, while fair falls into the range of 650 to 699. Poor credit usually scores between 600 and 640, while anything below 600 is considered bad credit. Generally, the better your credit score, the easier it will be for you to get credit at favorable rates and terms.
Beyond making it easier for you to get credit when you need it — without having to swallow higher interest rates — good credit scores affect many more aspects of your life. For example, landlords often review credit scores and reports before approving rental applications. Lenders check your credit score when approving you for a loan and determining what interest rate you will pay. Insurers often incorporate credit score information into the rating models they use to determine your insurance premiums. And many employers are now asking to look at credit reports and scores.
It’s worth noting that no one may review your credit report and score without your permission.
The steps toward improving your credit score are amazingly simple to understand, but not always easy to put into action:
Pay all your bills on time, every single month. If you have trouble remembering due dates, consider using your bank’s automated payment system to ensure you never miss a bill. But this takes some planning on your part so that you can avoid pesky fees if you have insufficient funds!
Don’t max out your credit cards. The ratio of credit you’re using versus the total credit you have available is a key factor in credit score calculations.
Apply for credit only when you really need it. Too many credit applications — known as “hard hits” — showing up on your credit report in a short period of time can negatively affect your score.
Use your credit cards wisely and pay off the balance every single month. Not only will this help you make progress toward a good credit score, it can help you reduce debt.
Pay down debt, especially credit card debt. The less you owe, the better your score.
The most important thing to remember about credit scores is that you are ultimately in the driver’s seat. Your financial behavior, both good and bad, will show up on your credit report and influence your credit score. Taking control of your finances and practicing good money management are the best ways to raise a credit score.