Credit Scores: What Are They and Why Do I Need One?
If you’re just getting your feet wet in handling your own finances or applying for your first loan, it is likely someone mentioned checking your credit score. Before you lose yourself in numbers and credit repair sites, we’ve broken down the basics of your credit score and everything it entails.
What is a credit score?
A credit score is a three-digit number that indicates how well you have managed repaying debt like credit cards, loans and other debts. Financial institutions and lenders will use this score to estimate how you will pay back a loan or credit based on loans and credit that you have had in the past. Think of a credit score as an adult GPA. The better you are at repaying loaned amounts, the higher your score will be.
Why do I need one?
Credit scores show lenders how you handle your finances. Say you want to buy a house, you’ll want a higher credit score to show the lender you can responsibly repay the loaned amount. In return, you can receive a better mortgage rate. Good credit scores don’t apply only to homeowners, as landlords can also use your credit score to decide if they want to rent to you.
The same goes for auto loans. When you’re ready to buy a new or used vehicle, credit lenders and dealerships will check your credit score and decide if you qualify for a loan. The better your credit score, the more likely you are to qualify for a loan with a better rate.
What is my credit score based on?
You credit score is based on information compiled in reports from Credit Unions, Banks and other lenders. These reports factor in your payment history, total amount owed, length of credit history, types of credit used and any new credit. Credit scoring models, like FICO and VantageScore, then use those reports to generate a score number.
What is a good credit score?
Credit scores are broken down into four scoring categories:
- Excellent: 750 and above
- Good: 680 to 749
- Fair: 650 to 679
- Poor: 649 and below
How can I build credit?
There are ways you can start building your credit. You can apply for a secured credit card where you make small purchases and then pay your bill in full when it’s due. With a secured credit card, your spending limit is based on the amount that you have in the savings account securing the credit card. This is a good option for people just starting to build credit or re-establish credit. If you’re confident that you’re able to make your payments in full and on time, try applying for a Landmark Starter Card or a regular Landmark credit card where you can earn cash back or rewards points on every purchase.
How can I improve my credit score?
If you’ve checked your credit score and you don’t like the number you’re seeing, there are a few things you can do to improve your credit score.
- Pay your bills on time - automated payments work best
- Set up payment reminders
- Contact your lender if an emergency has happened that might keep you from making a payment on time
- Pay any missed payments ASAP
- Keep balances low on credit cards
- Don’t open any new lines of credit that you don’t need
Using a credit card and applying for a loan is often necessary and can help improve your credit score. If you use your credit wisely and make your payments on time, you can build yourself a good credit score and a healthy credit report.