Understanding Credit Scores: A Guide to Improving Your Financial Health

What is a Credit Score?

A credit score is a three-digit number that represents an individual's creditworthiness. It is calculated based on their credit history, including payment habits and debt levels. The most widely used credit scoring model is the FICO score, which ranges from 300 to 850. A good credit score is typically above 700, while scores below 600 may indicate a higher risk for lenders.

Credit scores are not publicly disclosed, but they can be obtained by requesting a free report from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion.

Factors Affecting Your Credit Score

Payment history accounts for 35% of your credit score. Late or missed payments can significantly lower your score, while consistent on-time payments will positively impact it.

Credit utilization, which is the amount of debt compared to available credit, makes up 30% of your score. Keeping credit card balances low and avoiding maxing out cards is crucial for maintaining a good score.

Improving Your Credit Score

Requesting a free report from the credit reporting agencies can help you identify areas that need improvement. Dispute any errors or inaccuracies to ensure your score is accurate.

Make on-time payments and keep credit utilization low by paying off debts and avoiding new debt. Avoid applying for multiple credit cards in a short period, as this can negatively impact your score.