Understanding Your Credit Score: What it is and Why it Matters

understanding your credit score

If you’ve ever applied for a loan or credit card, chances are you’re familiar with the concept of a credit score. But fully understanding your credit score is easier said than done. A credit score is a numerical representation of your financial health that lenders consider when evaluating your applications for loans and other types of financing. Despite this critical role in influencing your ability to obtain new sources of credit, many people don’t understand how their score is calculated or why it matters. This blog post aims to give readers insight into their scores and why they should pay attention to them.

What is a Credit Score?

A credit score is a numerical representation of an individual’s creditworthiness. It helps lenders evaluate the risk associated with lending money or providing services and products to an individual. Credit scores are based on various factors, including payment history, outstanding debt amounts, types of accounts one has (i.e., credit cards vs. auto loans), length of credit history, and number of inquiries recently made to a person’s report.

Credit scores typically range from 300-850, with higher numbers representing a better score. Prime borrowers are generally considered preferable by lenders and have usually achieved a score above 720. Subprime borrowers have lower than-average scores, usually below 660. Superprime borrowers are highly desirable by lenders with generally perfect scores above 780. In contrast, deep subprime borrowers may have shallow scores below 550, making them more likely to default on loans or lines of credit they undertake.

Ultimately, your unique financial profile will determine your specific credit score. Still, your ability to repay loans according to terms should be considered the most critical factor in determining your eligibility for certain lender services. Maintaining good payment habits over time ensures that you achieve the highest possible rating when it comes time for creditors and lenders to review your application(s).

Factors That Influence Your Credit Score. 

Credit scores are hugely important when managing your finances, so understanding the various factors influencing them is essential. There are five main things you should be aware of when trying to increase or maintain a good credit score:

Payment History – 

This is the most important factor and refers to whether or not you have paid back any debts on time in the past. Even one missed payment can leave a major dent in your credit score, so as long as you make all payments on time, you should see some increases in your rating over time.

Credit Utilization – 

This refers to how much of your available credit limit you have used up relative to what’s available (i.e., how “maxed out” is your credit card?) Generally speaking, if you keep this ratio below 30%, then this should also help with increasing or maintaining a good score.

Length Of Credit History –

The longer history of paying debts off on time and opening accounts will generally result in a higher rating since it shows lenders that someone has been responsible with their money over an extended period and has proven themselves worthy of getting more favorable terms from creditors going forward.

Types Of Credit Used – 

Having multiple types of account open (think mortgages, car loans, student loan debt) helps demonstrate financial responsibility and provides greater temptation for lenders to lend at attractive rates when they see high demand for borrowing services across different channels by one consumer citizen/borrower/consumer profile applicant, etc. Being careful about which kinds of products* activate *(credit cards versus installment plans – debit cards versus line-of-credit ) could mean all the difference down the road!

New Credit Inquiries– 

It’s essential to keep tabs on further inquiries about credit because each request could ding from 5-10 points off the overall rating per inquiry! Shopping around every six months for personal loan rates won’t hurt once, but doing it too often could set alarm bells ringing, be selective & target conversations towards the best option. 

How Does Your Credit Score Impact You? 

Your credit score is a three-digit number that, at its most basic level, reflects your creditworthiness. The higher your score, the more likely you are to get approved for a loan or other type of credit. Your score also influences the interest rates and terms you’ll be offered on any loan or line of credit.

A good credit score can make it easier and faster to access loans and lines of credit with favorable terms, while a poor score is likely to lead to rejection from lenders or costly interest rates when approved for financing. A good starting point is a FICO Score over 670 which generally puts you in the category of ‘Good Credit.’

Credit scores impact beyond just loan approvals as they can play into rental applications and job screenings depending on the employer’s process and policies. Potential landlords might look at your rating before they approve an apartment application, so having bad marks might mean getting denied by a landlord even if you meet all other criteria, such as employment history and income levels. Similarly, employers conducting background checks may incorporate your credit profile into their decision-making process when assessing applicants for positions within their organizations.

Given all this information, it becomes clear how important maintaining a strong FICO Score is regardless of whether you’re looking for financing now or in the future – it pays off in many ways! Building up trust with financial institutions will pay off dividends over time. Not only will accessing secured funds become more accessible, but there will also be upside from better terms when making financial decisions such as car purchases or mortgage transactions – take charge now and build upon what counts!

How to Improve Your Credit Score? 

Improving your credit score is an essential step towards achieving your financial goals. Depending on where you start, knowing how to get there can be difficult without the right strategy. Fortunately, there are four key steps that you can take to improve your credit score over time.

Making Payments On Time: 

One of the most crucial elements of improving your credit score is paying bills on time, every single time. This means making payments in full and on time each month and setting up reminders so you never forget or miss a payment date again! It’s also vital to keep track of all past payments, as missed or late payments will lower your score significantly more than consistently timely ones.

Reducing Debt and Maintaining Low Balances: 

To make sure creditors view you positively when evaluating future loan applications or other forms of credit inquiries, make sure that any existing debt is paid down as quickly as possible while still maintaining low balances across all accounts and cards for which you carry a balance from month to month (which ideally should be no more than 30% of available funds). This indicates financial responsibility and management skills, which lenders look favorably upon when considering future loan applications or account inquiries.

Limiting New Credit Applications: 

Adding new lines of credit, such as car loans or mortgages, may seem like a great way to get access to additional funds during times when it’s necessary; however, too many hard inquiries into these kinds of accounts can hurt your overall standing with creditors if done too often in quick succession (more than three inquiries within six months). If at all possible, try limiting applications for new lines until after other debts have been fully paid off first, then proceed with caution based on what type/amount of debt fits into current circumstances realistically now versus what kind could add up over time given potential income increases/decreases going forward before taking out more financing agreements later down the line beyond just immediate needs today.

Keeping Old Credit Accounts Open for More Extended Credit History:

The longer an account has been open, generally speaking, it means higher approved scores from lenders, so avoid closing old accounts unless they become unmanageable due to their high-interest rates or fees associated with their long term. 

Need Help? 

Understanding your credit score is an essential part of financial well-being and security. It can potentially impact many major life decisions, such as applying for a loan or purchasing a home. Keeping track of your credit score and striving to maintain or improve it is essential. With this knowledge of a credit score and why it matters, you will have the tools necessary to make smart long-term financial decisions. If you need help getting started, Stone Tree Lending can provide answers and assistance with improving your credit score and becoming financially well-versed. Regardless of where you’re starting from on the journey of understanding your credit score, having the basics under your belt enables you to take definitive steps toward an improved financial profile. With vigilance and education, financial stability can be achievable! 

Understanding Your Credit Score | Stone Tree Lending Team

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