Why Is Credit Important?
Credit means receiving something of value now and promising to pay for it later, often with a finance charge added by the lender.
Why is good credit important? Credit plays a major role in your financial life from securing loans, renting out an apartment and even getting hired for a job. Borrowing will always help you build the financial life you’ve envision for yourself.
What is a Credit Score?
Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It’s designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring. There are a multitude of credit-scoring models in existence, but there’s one that dominates the market: the FICO credit score. According to myFICO.com, the consumer website for the FICO score developer, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.” FICO scores range from 300 to 850, where a higher number indicates lower risk. What’s a good score?. A consumer has three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. Unfortunately, consumers currently have access to only their Equifax and TransUnion FICO scores. Experian ended its agreement with myFICO.com in 2009.
How Do I Establish Credit?
You establish credit by using credit products responsibly and paying back what you borrowed in a timely manner. Activities that don’t directly impact your credit report can still be used to showcase your financial responsibility and help you qualify for credit.
Pay your utility bills on time. Open a checking account and use your debit card. Build a savings account. Get a secured or unsecured credit card in your name. Consider getting a student or auto loan in your name. These actions will help you start and create credit history.
How is Credit Calculated?
Payment history: (35 percent) — Your account payment information, including any delinquencies and public records.
Amounts owed: (30 percent) — How much you owe on your accounts. The amount of available credit you’re using on revolving accounts is heavily weighted.
Length of credit history: (15 percent) — How long ago you opened accounts and time since account activity.
Types of credit used: (10 percent) — The mix of accounts you have, such as revolving and installment.
New credit: (10 percent) — Your pursuit of new credit, including credit inquiries and number of recently opened accounts.
What is a “Good” Credit Score?
While different lenders have their own standards for rating credit scores, 700 and higher (on a scale of 300 to 850) is generally considered good. Lenders typically use your 3-digit credit score to help them decide if they’ll approve you for a loan or credit card. In general, the higher your score, the better your chances of getting approved. Having a good credit score can also help you save on interest rates. Of course, a specific score doesn’t guarantee that you’ll be approved for credit or get the lowest interest rates, but knowing where you stand may help you determine which offers to apply for – or which areas to work on before you apply.