Now that the bell has rung, it’s time to take your seats, get out your notebook and pencil, spit out your gum, and put your listening ears on for a lesson on the ABC’s of credit scores.
Defining a Credit Score
Your credit score is simply a quick way for lenders to assess their risk in giving you credit. Your spending and paying habits are considered; some things, such as payment history, carry more weight than others do; and an objective score is generated.
A credit score is an important tool that lenders use when considering your ability to pay back the money you’re asking for, which is why it’s so important to keep your score as high as possible. A higher score not only helps you get the loan or credit card in the first place, but it can also secure a lower interest rate for you, which will save you a lot of money in the end.
Suppose you’re trying to pay off your debt, not obtain more. What does a good score matter then?
The answer is, a lot. The higher your credit score, the better interest rate you’ll get if you decide to do a loan consolidation or credit transfer. Even if you’re not consolidating, a higher credit score may enable you to get a lower interest rate with your existing creditors. In addition, while it’s best to have an emergency fund set up in case something happens, such as a job loss or illness, if you’re unable to do this, it’s good to have the ability to get a loan with a lower rate.
Our lesson begins with the letter A.
When all your good credit information is considered with your bad, you should be left with a score that’s a fair estimate of your credit-worthiness. However, it isn’t uncommon for there to be errors on your credit report that can bring down your score. The three major credit-reporting agencies (TransUnion, Experian, and Equifax) rely upon information reported to them by your creditors and, unfortunately, it’s not always accurate. Your information may become mixed up with that of a person with a similar name or address, negative items that should’ve been purged from your report after a specified date were not, or it could simply be a case of human error. Whatever the reason, these inaccuracies can have a negative effect on your score.
You can request a free copy of your credit report from each of the credit bureaus once a year. Doing so will allow you to formally dispute any incorrect items on your report, likely raising your score.
Now that you’ve learned the ABC’s of credit scores, you can go out into the world and make financial decisions that’ll improve your score!