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What is a credit score?

Bad credit report
If you have poor credit or no credit at all, don't fret. Read on for tips on improving your credit score. Getty Images

Whether you're looking to open a new credit card, get a mortgage or purchase auto insurance, you need good credit. 

Your credit score helps give financial institutions a realistic idea of your general credit health. If your score is too low and you have poor credit, you might find that a lender will offer you a higher interest rate or other unfavorable terms. In some cases, you could even be denied the products and services you want most.

If you don't already know your credit score, you should consider using an online tool to help you. Get a free credit report now!

What is a credit score?

Your credit score is a three-digit number that measures your creditworthiness, or how likely you are to responsibly manage your financial accounts, including your credit card debt. This number ranges between 300 and 900, depending on which credit bureau is calculating it. The higher your score, the more creditworthy you are believed to be. It can unlock lower interest rates, better loan terms, new credit card options, available lines of credit and more.

If your credit score is on the lower end, don't panic: There are steps you can take to improve this number. It may not be a bad idea, though, to seek some expert advice on how to improve the way you manage your personal finances. You can start the credit repair process right now. 

There are three credit reporting agencies in the U.S., which are responsible for tracking and maintaining credit-based activity for American adults. These bureaus - TransUnion, Equifax, and Experian - receive information from existing creditors and provide this information to potential creditors who may "pull your credit." These creditors can use any number of different models to calculate your score, including FICO, VantageScore and others. So you actually may have more than one credit score.

To accurately determine where you stand, it's important to both obtain your credit score and your credit report. With Experian, you can get a free credit report within minutes.

A credit report will provide a detailed look at your credit history including things like outstanding loan balances, any late payments and age of accounts (the older your accounts are the more reliable of a borrower you can appear to lenders). Credit reports can also include outdated and erroneous information that can negatively affect your score. So it's worth reviewing closely to make sure it's complete, accurate and up to date. These reports are added to your credit history, where they will remain for seven years before falling off. 

Again, it's worth double-checking your score to make sure you have the latest number. Your credit score can change over time, so make sure you're using the tools available to you to have the most up-to-date information.

Whenever you open up a consumer-based account, such as a loan or credit card, the creditor will report the new account to at least one of the credit bureaus. Each month, they will also report your most recent account activity: whether the account is still open, how much you currently owe, what your credit limit is, whether you made your last payment on time and any personal information tied to the account. 

What causes a bad credit score?

While each credit scoring model has its own scoring ranges, anything below 580 to 600 is generally considered to be a poor score. If you have a bad credit score, this can result in denied loan applications, limited credit card options, and even higher car insurance rates. Poor credit is usually the result of one or more of the following:

  • Not having enough (or a varied mix of) different accounts
  • Payment history (late payments can particularly count against you)
  • Unpaid accounts or those that have gone to collections or been charged off
  • Credit utilization (how much of your credit capacity is currently available)
  • Too many inquiries in a short period of time
  • Too many recent new accounts opened
  • A history of bankruptcy and/or judgments

You can also earn a bad credit score if your credit history is limited or nonexistent. If you've never opened (or tried to open) a credit account of any kind -- a credit card, a loan, a charge card such as American Express or even had a medical bill go to collections, chances are that your credit report will be pretty sparse if not blank. If the credit bureaus don't have any information on your creditworthiness, it's difficult for a scoring model to calculate a score for you.

How to improve a bad credit score

If you have a bad credit score, improving that three-digit number is a wise goal. You don't have to wait to do so (and shouldn't). Repairing your credit is a process that can start now.

While a single late payment can drop your score by tens of points, building that score back up can take a lot more time and effort. In general, you'll better your chances of a good credit score by:

  • Filing disputes to correct any errors you may find on your credit report
  • Making scheduled payments on time every month
  • Keeping the balances on revolving lines of credit as low as possible (ideally, try to have a utilization of less than 30-35%)
  • Not applying for credit unless you need it
  • Consider a secured credit card to help prove your creditworthiness
  • Limiting how many new accounts you open in a short period of time
  • Paying off debt as quickly and efficiently as possible

If your credit history is limited, you can sometimes get your rent payments and even the payment history on your utility bills added to your credit report. As long as you've been making those payments on time, this can serve to boost your score quickly and get you to a good credit score.

Bottom line

Your credit score may sometimes seem like three arbitrary numbers, but they have the power to control many factors in your financial life. Building, and maintaining, a healthy credit score can not only make life easier but also save you money in the long run. Having a bad credit score is worrisome, but can absolutely be fixed with a little time and some dedication. 

If you're concerned about your credit score and want to work on improving it consider working with a credit repair professional. Begin with a free credit evaluation

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