What is a Credit Score?
You may have heard of it when you’ve tried to buy a car or open a credit card, a credit score is the rating passed on to you by an agency such as the Fair Isaac Corporation (hence the term FICO Scores). It essentially is a number that tells lenders how risky of an investment you are. This includes whether you’re likely pay on time, pay late, or simply default and not pay at all. From there a lender can decide how much interest to charge you, or if they even want to lend money to you are all. Interest is the price you pay for money to borrow so a lower interest rate is always better when you’re a borrower. In short, the higher your score, the less you’ll pay when you need to borrow money, and therefore the more you’ll save.
My Credit Score is 500, That’s Good Right? Right?
Well, uh this is kind of awkward. But um, no. The scores range from 300 to 850, so a 500 credit score is not where you want to be. There are a lot of different categories with minor differences, but generally speaking a 300-629 credit score is considered Bad, a 630-689 is Fair, a 690-719 is Good, and a 720-850 is considered Excellent. But don’t worry! There are many components that go into a score and there are many ways to increase what you’ve got.
Pay Down Credit Card Debt ASAP
This seems like a no brainer, but any outstanding bills you may have weigh on your credit history. On top of that, credit cards typically have a very high interest rate, so make sure that any outstanding credit card debt is taken care of before it racks up an absurd amount of interest.
Close Out Unused Credit Cards
Slightly less obvious is the impact a line of potential credit is on your credit score. Your credit limit is the amount you can borrow on each card. If you have 4 cards with an $800 limit on each, but only require $600 of credit per month you may want to prune which cards you continue to hold onto. Banks and potential lenders will see the amount you can borrow each month and factor that into how they view you as a credit risk. While they will see you usually spend $600 per month of your credit limit, they will also see you can borrow as much as $3200 in a month. This may make you appear as more of a credit risk than you truly are.
Regularly Purchase Items with a Credit Card
The most convoluted of all. The single best way to increase your credit score is to actually borrow more money, with regularity, and pay it off. Now, as with many things in finance, consistency is key with this one. Only pay for items with a credit card that you know you can pay off by the end of the month, this way you never carry a balance. This is the largest single contributor to your credit score; this is your payment history. If a lender sees that you regularly use a credit card, and regularly pay off the balance month in and month out, your credit score will increase greatly over time.
To Those with a Credit Score of 500, You Can Do It!
Building a good credit history isn’t easy and recovering from a bad credit score is even harder. The fact of the matter is with time and with consistency anyone can go from the Bad to the Excellent credit bracket. It’ll take some discipline, but a strong credit score can play an important role in the journey to financial freedom.
**Disclaimer: The Tempered Bull is committed to enhancing the finance wellbeing of our readers; however, these articles should not be your only resource. The suggestions made here are meant to be taken in conjunction with professional financial assistance. We are not financial professionals, just regular people with a passion for sharing our experience. The Tempered Bull does not have any private knowledge about the companies we discuss, and The Tempered Bull and its associates do not benefit from your purchase or sale of any equites. The Tempered Bull has a disclosure policy.