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The Evolution of Your Credit Score

kisspng-credit-score-stock-illustration-vector-graphics-im-kenzing-pinescript-credit-score-pinescript-tradi-5c08efcb5a26b3.1198486415440895473693March is National Credit Awareness Month — that special time of year when everyone is encouraged to sort their finances and climb out of debt. 

To accomplish either of these goals, improving your personal credit score is essential. 

Ranging anywhere from 300 to 850, credit scores may seem somewhat arbitrary. After all, how can you accurately capture a person’s financial health with a simple three-digit number?Arbitrary or not, credit scores are necessary for everything from buying homes to leasing cars to opening new credit card accounts. Lenders use this score to assess your ability to repay whatever loans they give you: 

  • With a good credit score, you’ll qualify for the lowest interest rates and fairly easy loan application approvals. 
  • With a bad score, you’ll receive the highest interest rates — assuming your loan application is approved at all. 

Learn How to Raise Your Business Credit Score

Who Manages Your Credit Score?

There are several reporting agencies  responsible for calculating and managing consumer credit scores, but the three biggest are: 

  • Experian 
  • TransUnion 
  • Equifax 

They regularly collect information about your financial history from businesses, creditors, and banks. These agencies then algorithmically create a profile of your “creditworthiness.” 

In other words, they come up with a three-digit score. 

You’re allowed one free report every year (from each of these agencies). Before trying to improve your credit score, be sure to grab as many copies of your report as you can. That’s because there are often slight differences from how Experian, TransUnion, and Equifax collect and analyze their data. 

Alternatively, you can sign up for any number of free monitoring services that will keep tabs on your credit score in “real time.” 

What Makes for a Good Credit Score?

For years, a score of 700 was considered really good. You could easily qualify for attractive rates and speedy loan approvals. 

But 700 isn’t what it used to be. 

It’s still considered “good,” but 700 is right on the edge. 

If you dip into the 699 range or lower, many lenders will be less reluctant to approve your loan applications or provide you with attractive rates. As a result, borrowing money will become harder and more expensive. 

According to monitoring service Credit Karma, a typical 30-year-old consumer can expect to pay an additional $3,375 per year in interest payments if his or her credit score moves from 700 to 699. 

Throughout one’s lifetime, that difference can add up to more than $130,000 in unnecessary interest charges. 

One point isn’t a lot of wiggle room. All it takes is a temporary setback to push you below the 700-point threshold: 

  • A late car payment 
  • A medical emergency 
  • A government shutdown 

Because many types of financial setbacks aren’t in your control, you should actively work to improve your credit score as much as possible. 

Doing so won’t shield you from credit score downgrades entirely, but it can provide you with a little extra leeway if and when the unexpected happens. 

How to Improve Your Credit Score

The three big reporting agencies all use different systems to calculate your score. Below are some of the biggest considerations that factor into their calculations: 

  • The amount of money borrowed at any given time (across all of your accounts) 
  • Your utilization rate (i.e., how close you are to maxing out your spending limits) 
  • The age of all your credit and loan accounts (older is usually better) 
  • Your repayment history — including delinquent bills and penalties 

Because all of these elements are constantly in flux, your credit score changes all the time. In fact, some monitoring services update their numbers every seven days. Moreover, it’s not uncommon for mistakes to appear on your record — especially if you’ve ever fallen victim to identity theft or credit card fraud

However, the frequency of updates is ultimately moot — whether it’s daily or monthly. 

You still need to regularly check your score, remove any blemishes and work on improving your attractiveness as a borrower. Doing so is imperative if you want to move toward true financial independence. 

Fortunately, we’ve published an exhaustive article that covers proven strategies for overcoming debt, reducing interest payments, and moving your credit score into the “excellent” range of 750 points or higher. Be sure to read 4 Tips for Paying off Debt. Doing so could save you a fortune. 

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Topics: Small Business Tips, Awareness, Consumer Education

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