A credit score is one tool companies may use when you apply to borrow money. Understanding how credit scores work can help you make informed decisions before applying for a credit card, auto loan, mortgage, or other credit product.
What is a credit score?
A credit score is a number that predicts how likely you are to repay borrowed money as agreed. It is based on information in your credit reports. Many credit scores use a range of 300 to 850, but different scoring companies and lenders may use different models and ranges.
A higher score may make it easier to qualify for certain credit products or to receive more favorable terms. A score is not the only factor a lender may consider. Income, debt, collateral, loan type, and other information may also matter.
What can affect a credit score?
The exact formula depends on the scoring model, but common factors include:
- Payment history: whether your payments are made on time.
- Amounts owed: how much debt you have and how much of your available revolving credit you use.
- Length of credit history: how long accounts have been open and managed.
- Credit mix: the types of credit accounts in your history.
- New credit: recent applications and newly opened accounts.
Five habits that may help your credit
- Pay on time. Set up reminders or automatic payments, and make sure there is enough money available before a payment is drafted.
- Keep your credit card balances well below your total limits. This helps you maintain a healthy credit profile and can make you feel more financially secure.
- Apply only when needed. Several applications in a short period may affect some scores.
- Review your credit reports carefully. Check for unfamiliar accounts or incorrect information, and dispute any errors with both the credit reporting agency and the business that provided the data.
- Give it time. A strong credit history is usually built through steady habits over months and years.
Credit report vs. credit score
A credit report lists information about your credit accounts and payment history. A credit score is calculated from information in a credit report. Checking your own credit report does not lower your score. You can request free weekly credit reports from Equifax, Experian, and TransUnion at AnnualCreditReport.com.
How can someone start building credit?
Options may include a secured credit card, a credit-builder loan, or becoming an authorized user on another person’s account. Each option has costs and risks. Ask how the account is reported, review all terms, and choose only a payment you can afford.
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The bottom line
Credit scores are based on information in your credit report and can change over time. Paying on time, keeping balances low, limiting unnecessary applications, and regularly checking your reports can help you build a stronger credit history.
Talk with an Anderson Brothers Bank lender about the application process and the information that may be reviewed.