Grades are not just for the classroom. You have an adult degree that is fundamental to your financial life: it is your credit rating. And just like ratings, a better credit rating can help you make progress in life.

Whether you need to score a mortgage, Buy a carmeet the requirements for a credit cardrefinancing Student loans or rent an apartment, it’s all based on your credit rating. If you are not familiar with credit results and how they affect almost every aspect of your financial life, here is an example.

Read more: The best credit monitoring services

What is a credit rating?

Your credit rating is a three-digit number that is calculated based on your credit report. When you apply for a loan, lenders check your credit report and the corresponding result to determine if it is worth lending money.

This is the easiest and simplest way for lenders to find out if you are worth the risk of lending money. A bad credit rating can mean either a loan waiver or a higher interest rate. An excellent result means that you pay less interest because you have proven that you are responsible with the loan.

Why are credit ratings important?

Your credit rating determines your credit health. Anytime you want to get a credit card or apply for a loan, expect a credit check. If you have a spotty credit history filled with late payments, defaults and high credit usage, you may not receive approval for credit options in the future.

How are credit ratings used?

Every time you want to borrow money, lenders will check your credit rating. I think about:

  • Loans for cars and automobiles
  • Mortgages
  • Personal loans
  • Student loans
  • Credit cards
  • Some applications for renting apartments
  • Some employment verification procedures

If your credit rating is bad or even fair, your loan application may be denied. Or if you are approved, you may face higher interest rates than people with good or excellent credit.

What is a good credit rating?

The higher the three-digit number, the better your credit rating.

There are several different models for credit scoring and different reporting agencies and credit bureaus use different ones. Both FICO and VantageScore – the two main credit rating models – range from 300 to 850.

300-579

Very poor

580-669

honest

670-739

good

740-799

Very good

800-850

Excellent

For FICO Scores, a good credit rating is between 670 and 739. For VantageScore, a good credit rating range is between 661 and 780.

VantageScore

Rating

300-499

Very poor

500-600

Poor

601-660

honest

661-780

good

781-850

Excellent

How are credit ratings calculated?

Credit scores are calculated based on your credit report for everything from payment history to different types of credit usage. this is how FICO breaks his score:

Payment history, 35%: Timely payment history is the biggest determinant of your credit rating. Lenders want to know if you can pay your due on time each month and until your repayment is complete.

Amounts due, 30%: If you pay off your credit cards as much as possible each month, the amount you owe – or the credit utilization – is high. This tells the lenders that you have a lot of consumer credit and you are a risky borrower.

Credit history length, 15%: This is how long you have credit in your name. If you have taken out student loans for college, this counts and can give you a longer credit history than you think. These are not just open accounts; closed accounts are also calculated.

New loan, 10%: When you apply for a new credit card or loan, it can boost your credit rating. Keep in mind that a firm credit request will temporarily lower your score. It will be restored in a few months, as long as the minimum payments are made on time each month.

Credit mix, 10%: The variety of loans you have tells lenders that you can handle many different types of accounts. Although it does not carry as much weight as other factors, it is still part of the credit rating puzzle.

VantageScore includes all of these factors, but not necessarily at the same weight.


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How do I increase my credit rating?

Not all credit problems are the same, which means that they cannot be treated equally. How you improve your credit rating depends on several factors and what works best for you in your individual financial situation.

If you are late with payments: A late payment can lead to a drop in your credit rating. Very late payments and even non-performance of a loan will cause your result to fall sharply. Proof of regular, timely payments shows creditors that you can borrow money and return it responsibly. Start making minimum payments by the due date each month. You will see your score slowly rise after several months of regular payments.

If you use too much credit: The high use of credit – or the amount you owe – must be reduced. It is best practice to keep your absorption below 30% (and ideally below 10%) if you are unable to pay your credit card balance in full each month. If you’re in a good position with credit card issuers, ask for an increase in credit to reduce your overall usage.

If you do not have enough credit: If you are new to lending or borrowing money, diversify your credit by applying for new lines of credit, such as a credit card. Try to limit how many new credit lines you open each year. Every time you apply for a loan, your credit rating is destroyed by a firm loan request. Too many credit inquiries can lower your credit rating.

How do I know what my credit rating is?

There are many free ways to check your credit, including:

  • Your bank: Most banks allow you to check your credit rating every month for free.
  • Your credit card issuer: If your credit card issuer is not your bank, you can still get a free, updated credit rating every month.
  • mint: It is free to open a mint account and use it as you wish. You will receive an updated credit rating every week.
  • Credit karma: Receive a free credit rating update from major credit bureaus such as TransUnion and Equifax weekly when using Credit karma.
  • Experian: You may not be able to get it on a weekly basis from Credit Karma, but you can get yours Experian credit rating per month, free of charge.

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