Unless you’ve led a very sheltered life you’ve probably heard different people talking about credit scores. Some might boast they have an excellent score while others might admit to having a less than desirable score. But what is a credit score exactly, and how does it affect you?
What is a credit score?
In simple terms your credit score is a measure of how well you manage the credit facilities you have. These can include loans, overdrafts, credit cards, store cards and catalogue accounts – in fact anything that allows you to borrow money.
Different companies use different methods of scoring when it comes to credit however the most common method is with a ‘points’ scale. So for example, a scale might range from 0 to 1000 where a score of 900+ is deemed excellent, 750-900 is good, 500-750 is acceptable and anything lower than 500 is poor.
When you use your credit facilities e.g. you buy something with your credit card, your card provider submits a report to your individual credit file at the end of each month that says how well you are sticking to the terms of your credit i.e. are you staying within your limit, are you paying on time, are you paying the minimum amount or additional amounts etc. Good reports improve your credit score whereas bad ones have the opposite effect.
What is a good credit score?
It’s hard to answer the question ‘what is a good credit score’ because the various organisations that collect data about credit usage use different scoring methods. Most do in fact use the points system explained above but whereas with one organisation a score of 750 might be good, with another it might only read as acceptable. Generally speaking, the closer your credit score is to 1000 the better.
How to improve your credit score
If you find that your credit score is lower than you’d like, all is not lost. There are some easy ways to boost it…but it won’t happen overnight. You can use the following methods to boost you score but be careful your spending doesn’t get out of hand.
- Make use of your available credit – using a credit card on a regular basis for small purchases does in fact help to boost your credit score. If lenders see that you make use of your credit in a sensible way they will offer more credit and submit good reports to your file.
- Make payments early – if you can pay your credit card bills or catalogue bills before the due date each month. If you can’t always do this though, make sure you never default on a payment as this will be recorded in your file.
- Make additional payments – making small additional payments to credit cards, catalogue accounts and store cards will also boost your credit score. These don’t have to be large payments, just a few pounds a few times each month.
- Pay more than the minimum payment – paying more than you technically have to each month is a great way to boost your credit score, and especially if you can do it on two or three accounts. Obviously this isn’t always possible but when you can do it you should.
Controlling your credit facilities well on a month to month basis will help to boost your credit score but it will take several months for your extra payments etc, to have an effect. Stick with it though and you’ll soon see your score moving towards the perfect 1000 points tally.
Image Credit: By Dave Dugdale from Superior, USA (Analyzing Financial DataUploaded by Ainali) CC-BY-SA-2.0 via Wikimedia Commons