We often hear people talk about credit scores when they’re trying to get a loan, a new car, or maybe a home mortgage – in other words, important things that can have a long-term impact on a person’s life. But the number itself can be a little confusing. It’s like getting a score on a test you don’t recall taking. So, what does it mean?
First things first: A credit score is a three-digit number that falls somewhere between 300 and 850. Your personal score represents your credit risk, based in large part on your ability to pay your bills on time. Equifax, one of three credit reporting agencies, offers this quick take of credit scores:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
But the picture for any one person is a bit more complicated. A score can go up or down, and there are definitely ways to turn a low score into a better one.
What Does a Credit Score Represent?
Your credit score correlates with the information in your credit report, such as your credit card payment history, bill payment history, how much outstanding debt you have, and the length of your credit history. A higher number can represent a history of more responsible spending behavior. A good score – 740 or higher – means lenders and creditors will be more optimistic when gauging a credit request, and therefore more likely to extend you the money. Red flags such as late payments and maxed-out credit cards are common sources of lower scores.
Common Things Affected by Credit Scores
Many consumers don’t realize their credit score matters until they are turned down for a loan or service they have requested. Consider these four reasons to get your score up to snuff:
Getting the home you want: Before extending you credit to buy a home, the mortgage lender will want to ensure you won’t default on your mortgage. Without a good enough credit score, they may deem you too much of a risk to provide you with a mortgage loan.
Getting a Job: If a score is low enough, some employers will hesitate to hire you.
Auto loans: Your credit rating may affect whether you qualify for an auto loan, how much you receive, and the interest rate of the loan.
Regular living expenses: Even utility companies conduct credit checks to see if someone is a reliable customer. Before getting cable, water, or cell phone service, the service provider will often check to make sure your credit is decent.
Does a Low Credit Score Really Matter?
Lower scores are more common among young people who haven’t had the chance to build up a credit history. However, over a period of many years, a consistently low score can bring with it some potentially negative consequences. A score under 580 means you will have a harder time getting loans. The irony of a low score is that the terms of the loan are less favorable to people who need them more. If someone with poor credit is approved for a loan, that person will typically be charged higher interest rates and fees.
If you’ve ever dreamed of opening your own business, your ability to get a loan may be especially important someday. About 43 percent of small businesses applied for a loan in 2019 – two thirds of which were accepted. That means a full third of people hoping to open their own café or salon had to search for other funding sources.
What to Do About It
The first step to improving a score is finding out what is causing it. Inaccurate or missing information is surprisingly common in credit files and can be fixed by reporting the problem online. However, behaviors such as maintaining a high balance on multiple credit cards and defaulting on loans and bill payments are more likely the source of a low score. Demonstrating a history of on-time bill payment is one of the best ways to improve credit scores. Look for ways to lower the balance on credit accounts. And, of course, avoid opening any new accounts that will only cause you to get further in debt.
Use a Prepaid Debit Card
A prepaid debit card can be a great way to have the convenience of plastic without the temptation to spend money you won’t be able to pay back. They are a safe alternative to a bank debit card that can help protect you against identity theft while also building credit. Stop by any South Suburban Currency Exchange (SSCE) to load your prepaid debit card with any amount of money you need – then use your new debit card to make purchases.
Improving your credit score won’t happen overnight. What you can do is set your sights on smart spending habits and small financial goals that will improve your financial situation over time. Stick to it, and eventually, you will have the credit score that you desire.
Visit SSCE online or in person at one of four locations in Richton Park, Frankfort, Mokena, and Park Forest, to find out how our financial and auto services can simplify your life AND help you make smart money decisions. Our trained assistants will be happy to answer your questions!