Understanding Your Credit Score
A credit score is a number that tells a bank or lender how “creditworthy” you are when it comes to paying back a loan. The higher your credit score, the more confident a bank will be in your financial situation — and you’ll be in a better borrowing position than someone with a low credit score.
How do you build up your credit, and what do the numbers actually mean? Here are four things to help answer those questions and explain what you need about your credit score.
Credit Score Range
Credit scores range from 301 to 850. You earn points based on credit activity, meaning how often you borrow and pay back money in a timely manner, without interruption. In general, the rankings are as follows:
- Excellent: 781 to 850
- Good: 661 to 780
- Fair: 601 to 660
- Poor: 501 to 600
- Bad: anything below 500
What Affects Your Score
Your credit score is influenced by a variety of factors, including the amount of debt you hold, whether you make your rent or car payments on time, and even the actual number of credit cards you hold in your name. If you have a credit card with a high balance, or if you have several credit cards that carry balances, your score will be negatively impacted.
Why Good Credit Matters
People with good credit scores benefit in many ways, from enjoying lower mortgage and car loan rates to being quoted at lower premiums for insurance policies. For example, let’s say you’re shopping for a $25,000 car. If you have excellent credit, your interest rate could be just 2 percent, but someone with bad credit could pay a whopping 20 percent rate. Over the life of the loan, that’s thousands of dollars.
How to Build Your Credit
The best way to build your credit score is to pay your debts on time and in full. If you have credit cards you don’t use, close the accounts. Also, be sure to pay off balances for doctor and dentist visits, as well as any small balances that you have on specialty credit cards, such as those issued by clothing or electronics retailers.
You Don’t Need Credit at RAC
All you need is a place to live, a job, and a few references to take advantage of all RAC has to offer.
Still, using credit for purchases encompasses more than just the items you own today — it can also make a big financial impact on your future. Take time to understand your credit score, and take steps to improve your score whenever you can.