These days, it’s more important than ever to have good credit. Banks, landlords, and
even prospective employers want to see your credit score. But what exactly is “credit”? Put simply, your credit score shows what banks think of your ability to
pay back your debts.
If you have bad credit, it means banks think you are at a high risk of defaulting
on your loan, or not paying back the money you owe. If you have good credit, it means
the banks believe there is little risk that you won't pay back your loan.
Bad vs. good credit
When you have bad credit, it’s difficult to get or use borrowed money, such as a credit
card or loans for a car or a home. If you have good credit, it's easier to get new
loans, open a credit card account, and borrow more money if and when you need to.
Credit bureaus look at your history of using credit and they calculate your credit
score. A credit score is called a FICO score, which stands for Fair, Isaac and Company.
A credit score can range from 300 to 850. You want to have a score at least in the
700s to be well qualified for more credit and loans and to get a better interest rate
Many factors can affect your credit score, which is a number that is assigned to you
based on your history of borrowing money and paying it back. These factors include:
If you have ever missed a payment on a bill or paid late
If you have had bankruptcies, garnishments, liens, or judgments on your record
How long you have been using credit
How many different types of credit accounts you have in all, such as credit cards
How much credit you have compared with how much of it you're using. For example, how
high your credit card balance is compared with your limit
How much total debt you have
How your credit score changes
Your credit score can change often, both in good ways and bad. If you borrow more
money, miss a payment, or use up more than 50% of your limit on a credit card, your
credit score will drop. If you pay off a lot of your debt and pay all of your bills
on time, your credit score will go up. That is, it will get better.
Why your credit score matters
Banks use your credit score and history to decide whether to offer you more credit
or loans when you apply for them. They also use this information to determine the
interest rate at which you will pay back any money you borrow. If you have a low credit
score, you’ll often be charged a higher interest rate on your loans and credit cards
than people with good credit scores. This means that over time, you will pay more
money to pay off your debt.
Improving bad credit
If you have bad credit or are having trouble paying off your debts, credit counseling
services are available to help you pay down your debt at a more affordable rate. Talk
with them about how their services will affect your credit score in the meantime.
You can also try contacting your credit card companies yourself to see if they can
help you find a way to pay down your debt in a more manageable way.
It's a good idea to check your credit regularly to look for any errors. You can get
a free copy of your credit report once each year at www.annualcreditreport.com or by calling 877-322-8228. This report does not include your FICO score, but the
score can be purchased when you request your free credit report. A credit report includes
details of your identity and employment, your existing credit, public information,
such as tax liens or legal judgments against you, and credit inquiries made about
You can also take these simple steps to improve your credit score:
Automate your bill payments to ensure that you meet all your due dates.
Don’t charge up more than 50% of your credit card limit. That alone will lower your
Pay down your debt.
Keep your old credit cards open. A longer credit history means a higher credit score.
If your credit report has errors, contest them and get them corrected.