If you’re like most people, you probably think a good credit score only matters to creditors and lenders.
But many don’t realize that a healthy credit score can benefit all aspects of your life — from getting approved for a mortgage or car loan to qualifying for the best interest rates on new accounts and lines of credit.
Here, you’ll learn how credit scores work and how to improve yours today.
What is a good credit score and what influences it?
According to Equifax, a good credit score is usually considered to be a score between 670 to 739 and is regarded as prime credit. A prime credit score means that you’re a low-risk borrower, which is what lenders prefer.
Scores from 580 to 669 are considered fair credit, but they don’t hit the all-important prime-credit benchmark.
Five main factors influence your credit score, including your payment history, amounts owed, the length of your credit history, new credit and credit mix.
Payment history is the most critical factor, accounting for 35% of your total score. This is followed by credit utilization (30%), the length of your credit history (15%), new credit (10%) and credit mix (10%).
There are different credit scores with different credit ranges, but FICO and VantageScore are two of the most widely used types of credit score models.
A FICO score is a three-digit number used to represent your creditworthiness. The FICO score range is 300-850, with a majority of the best rates and higher credit limits available to those with above a 700.
Related: What is the Highest Credit Score?
This score is based on your credit history and considers five factors:
- Payment history
- Amount owed
- Length of credit history
- New credit
- Type of credit used
As with the FICO score, the VantageScorecredit score ranges from 300 to 850, and anything above 700 is a “good” score.
Created in 2006 as an alternative to the FICO credit scoring model, the VantageScore is used by many lenders and is typically less biased against consumers with limited credit history compared to FICO scores.
The benefits of having a good credit score
A good credit score is essential for many reasons. It can help you get approved for a business loan, obtain a lower interest rate, receive a higher credit limit, secure more competitive credit accounts and rent an apartment, among other things.
A good score signifies financial responsibility and shows you can manage your finances. It also shows lenders that you’re likely to repay your debts. Thus, the highest credit scores get the best rates.
Maintaining a high credit score is critical; if you have a poor score, you’ll want to improve it as soon as possible. You can do this by paying your bills on time, keeping your debt levels low and only applying for credit when necessary.
Understanding the importance of achieving a higher credit score might be all the motivation you need to make changes.
How to get your credit score for free
Checking your average credit score is an integral part of maintaining financial health. Many people need to learn how to check their credit score or where to find it.
Here are a few simple ways to obtain a free credit score:
- The first step is to request a free credit report from the three major credit bureaus: Equifax, Experian and TransUnion. You’re entitled to one free report from each bureau every year.
- You can also get your credit score through free online personal finance tools like Mint and CreditKarma (beware of some resources that claim to be free but ask you to input payment information, which will usually get billed after a free trial).
- Some credit card issuers offer free monthly access to your FICO score as a perk for being a cardholder.
By taking advantage of these free resources, you can keep tabs on your credit score and catch any potential problems early on.
How to improve your credit score
Improving your credit score may be challenging, but simple strategies can raise your score relatively quickly (as long as you commit to them).
Here are a few tried-and-true tactics:
Pay on time
This includes any type of loan, credit card or utility bill (so long as the utility company reports your payments to the credit bureaus). Maintaining on-time payments is one of the simplest ways to keep a good credit score. It demonstrates that you’re reliable when it comes to your financial commitments and can also help you avoid interest payments and late fees.
All of these factors can add up and positively impact your credit score. On the flip side, missed payments and late payments on things like student loans or credit card debt can drastically harm your credit.
Keep your credit utilization ratio low
Your credit utilization ratio measures how much of your available credit you are using. It’s calculated by dividing your total credit card balance by your total credit limit. A high credit utilization rate can lower your credit score, so it’s essential to keep it low.
Aim to keep your ratio below 30 to 35% of your available credit (for all your credit cards). And if you have multiple cards, try to keep the overall ratio below that same threshold. There are several ways to do this, but the easiest is to spread your spending across all your cards.
Related: How Many Credit Cards Should I Have?
Try to get negative items removed from your credit report
It’s essential to review your credit reports regularly for accuracy. If you find errors, promptly report them to the credit bureau and have them fixed. You can do this by submitting a dispute online or by mail.
The credit bureau will investigate your claim and update your report if it determines the information is inaccurate.
Remember that it may take time for the bureau to resolve the dispute, so be patient. If you’re unhappy with the bureau’s investigation results, you can escalate the matter to the Consumer Financial Protection Bureau or your state attorney general.
Credit reporting errors can be costly and inconvenient, so correcting them as soon as possible is critical.
Pursue a healthy credit mix
Credit scoring models and lenders look favorably on borrowers who manage different types of credit (for example, mortgages, loans and credit cards) accounts well. If you only have one type of account, you could appear over-reliant on credit, which is a red flag for lenders.
Related: 10 Ways to Improve Your Credit Score
How can you achieve a good credit score?
A credit score is a significant metric that determines your access to financial products and services. A good credit score can open doors, while a bad credit score can close them.
You can put yourself in a better position financially by learning how the different types of scores are calculated and making an actionable plan for improving your own credit.
If you have a low credit score or need help fixing your credit, prioritize on-time payments, find a reputable financial counselor and research the wealth of online resources at your disposal.
Looking for more content to expand your financial knowledge? Explore Entrepreneur’s additional Money & Finance resources here.