If you are interested in buying a new car or applying for a mortgage, your credit score could make a big difference in what you are able to borrow and the interest rate available to you. In order to secure the best terms, you will benefit from reading this simple guide to understanding credit scores.

What is a Credit Score?

A credit score gauges the probability that an individual will repay their debts based on their borrowing history. This score can range from 300 to 850.

The higher number a person receives, the more financially trustworthy they are believed to be. A good credit score is considered to be at least 700. It is used to help lenders decide whether or not to extend a line of credit or approve a loan, and determine its interest rate.

Every consumer receives three credit scores, from three reporting agencies: Equifax, Experian and Transunion. Checking all three regularly helps with understanding credit scores.

Understanding Credit Scores: How is a Credit Score Rated

The three credit major bureaus receive credit-related information and pull relevant public records to get a picture of your financial health.

There are up to five main factors that are used to calculate a credit score:

• Payment history
• Loan balances outstanding
• Length of credit history
• Applications for new credit
• Types of credit accounts (mortgages, car loans and credit cards)

Negative information in a credit report can include, liens, judgments and bankruptcies. Banks use this information to provide insight into your financial status. Any negative information can remain on a credit report for seven years.

How to Improve your Credit Score

It’s important to monitor your credit score, because there are ways to change it.

Whether your score is above or below 700, there are a few tricks you can use to raise your score.

• Keep credit card balances low
• Pay bills on time every time
• Don’t remove old debt from your report

It’s important to double check your credit report for accuracy, because mistakes may be made that influence your score. Everyone is entitled to a free credit report from each of the three credit reporting agencies once every 12 months. Visit annualcreditreport.com for more information.

Understanding credit scores is a key step in developing financial literacy. If you would like to learn more about personal financial planning, contact a local accountant.