Credit plays a role in everything from buying a home, to signing up for cell phone service or utilities, to getting car insurance. A credit score is a snapshot taken by the three leading credit bureaus, TransUnion, Equifax and Experian, that allows lenders to determine whether or not you will be extended credit, the amount of credit and even the terms (interest rate, loan amount, repayment schedule).
While I am not a credit counselor, I can give you a little bit of information about credit scores and some basic steps to keep them healthy, which are important for you to know when applying for home financing.
What is a credit score and how is it calculated?
A credit score is a number between 300 and 850 that is used to predict how likely you are to pay your bills. Many of the companies with whom you have a loan or a line of credit report back to the three credit bureaus information such as whether you pay on time, your credit amount, etc. Your credit score is calculated from this personal financial information. The higher your credit score, the better the credit terms you will receive. The lower your score, the higher the interest rates you may have to pay. Generally, scores over 700 are considered excellent while scores below 600 are considered poor.
You are eligible for one free credit report per year from each of the three credit reporting agencies. Take advantage of this opportunity to monitor your credit report and ensure there are no mistakes or surprises with your credit.
How can I improve my credit score?*
Although there are no quick fixes when it comes to improving your credit score, you can take steps to rebuild your score over time:
- Continue paying your bills on time — your payment history matters.
- Don’t max out your cards or even run the balances up high.
- Hold off on applying for new credit or cancelling an old card, since length of credit helps.
- Pay down high balances, but don’t just transfer debts among several lenders.
- Settle any collections or past due accounts that you possibly can.
- Dispute and resolve any inaccurate items in your credit report. The last two years of your credit history are the most important.
Credit scores affect your life — beyond just mortgage interest rates.
Credit scores are often used in determining prices for auto and homeowners insurance. Employers have also begun using the scores as part of background checks when making hiring decisions. The practice of using credit scores in nontraditional ways is expanding. It’s more important than ever to educate yourself about credit.