How Do Credit Scores Work?

You probably know the term ‘credit score’, and you may even have a vague idea of what it is. But how much do you really know about credit ratings and how your rating can impact your life? Keep reading to find out everything you need to know about credit scores.

 

What is a Credit Score?

A credit score is a number based on the information on your credit file. This number is used to help lenders determine how reliable you are when it comes to paying back loans. Therefore, your credit rating affects if you are able to get a loan or not, and if so, how much they are willing to lend you.

 

How is a Credit Score Determined?

The credit score is worked out based on your credit history and financial habits. Applying for several loans with different providers within a short period of time will have a negative effect on your credit rating. Being refused a loan will also diminish your rating. Missing or making a late payment on a current loan will impact your credit score for five years, so be sure to make payments on time. Characteristics of your credit profile are also taken into account, such as how long you have been employed and your age.

 

What Are the Score Ranges?

The score is a number between 0 and 1,200, or 0 and 1,000. The number correlates to a scale, the smaller the number the worse your score is. The scale is as follows:

  • Below Average: 0-509:
  • Average: 510-621
  • Good: 622-725
  • Very Good: 726-832
  • Excellent: 833-1200

If your credit score is below average, or average, you will probably be declined a loan application, which will harm your rating further. The best thing to do is to build up your credit score to good or above before making any applications.

 

How Do I Get a Good Credit Score?

If you have a bad credit score, don’t panic! These scores can easily change over time, and it’s not difficult to improve it. The best way to improve your rating is by ensuring you pay rent and bills on time, as well as loans like mortgages. Lowering credit card limits and paying off the credit card in full each month will also help improve your credit score. The main thing to avoid is applying for a loan, as you will probably be declined and this lowers your score.

 

How Do I Check?

It’s actually quite important to check your credit report to protect you from fraud. You can get free credit scores from lots of online providers. The results can vary, so to get an accurate number have a look on more than one online service. Remember, your credit score does change, so don’t be concerned if its different each time you check.

 

Considering how important credit scores are, its strange that it remained a bit of a mystery. But hopefully you are now more aware of what your credit score is, how it impacts you and how to improve it.

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