The credit score – a seemingly ‘all-knowing’ number that will determine your eligibility to get a mortgage or rent an apartment, buy a car, start a business, and more. This little number is a huge part of your life, so you need to do what you can to get it as high as possible. But, you may say, “it seems so arbitrary! What can I do to raise it?”
Never fear, dear reader! The professionals here at Vargas and Vargas Insurance Agency are here to demystify the credit score. Here are the details on many of the most-asked credit score issues:
What is a Credit Score?
When making a decision about whether you’re a good candidate for a loan, institutions want some credit history. Rather than sift through your entire history, though, they quantify your past spending. Credit bureaus take many factors and turn it into a number between (generally) 300 and 850. They pass this number on to the institution you’re looking to borrow from so that a decision can be reached.
What affects Your Credit?
The three credit bureaus (Experian, TransUnion, and Equifax) take many things into account when determining your credit score. Each is slightly different and has differing weights, but generally the things that will affect you the most are:
- Whether you pay your bills on time
- How much of your available credit is being used.
- The types of credit you carry.
- The number of active credit accounts you have open.
Establishing Credit
For young people and those that have not previously taken out a loan or owned a credit card, the question of how to establish credit can feel like a Catch-22. Most places want you to have a credit history before they will extend you any additional credit, so starting out is tricky.
Thankfully, there are a few products available to new borrowers. One is a secured credit card – you may open this line of credit by providing a deposit to back the card, and you can reclaim the deposit when the card is closed. You can also open a traditional credit card with a co-signer that has an established credit history.
Another way that many people establish their credit is with a student loan. There are many types of student loans available, so if this is the route you wish to take, do your homework to find the product that best suits your needs.
Improving Your Credit Score
If you’re looking to buy a car or apply for a mortgage, you may want to improve your credit score. There are several ways to raise your credit score. The quickest is to check all three of your credit reports to ensure that there are no mistakes.
Once you have made sure that your credit reports reflect your financial standing, you can move on to other methods of raising your score. Be warned, though, that it will take some time before you see an improvement. To see your credit score increase, you will need a history of on-time payments with a variety of lines of credit that you have carried for a long time.
Remember also that your credit score will take a small hit when you apply for a new line of credit, so if you want to apply for a mortgage in the near future, ask a financial planner whether you should wait to open a new credit account or purchase a new car.
Myths About Credit Scores
Don’t listen to everything you hear when it comes to your credit score. There are lots of myths floating around that aren’t true! Like these:
- Your credit score measures how rich or poor you are – People with less income that have established credit and pay their bills on time can have a better score than higher income people with little to no credit and a history of late payments.
- It doesn’t matter how much of your available credit that you use – Credit utilization is a key factor when determining your score. Often, people with better credit use far less of their available credit than people with low credit.
- Only one person in a relationship has to have good credit – When you apply for a loan or mortgage with your partner, both of your scores will be analyzed.
- You have to carry a balance to have a good score – In fact, you can pay off your card(s) in full each month and still have a great score. Paying in full also means that you won’t have to pay any interest!
Does that answer all of your questions about credit scores and how they affect you? If you have more, reach out to us – we can direct you to a professional with the answers.
And if your credit score recently helped you get approved for a home, car, or business loan, call us! We can get you set up with the right insurance policy to protect you. Our quotes and insurance reviews are always free, so you have nothing to lose.
