Thanks to record-high inflation and rising interest rates, it’s becoming tougher to keep debt at reasonable levels and maintain good credit. In fact, total consumer debt reached a record $17 trillion in the first quarter of this year.
Even so, the average FICO credit score in the U.S. was 714 as of 2022, according to data from Experian. That’s considered “good” based on FICO’s credit score ranges.
But if your score is lower, don’t stress. There are a few steps you can take to improve your credit score—or even build one from scratch. Here’s how.
Understanding your credit score and how it works
Your credit score is a numerical representation of your history with borrowing and repaying money. It’s a three-digit number based on the information contained in your credit reports, which are maintained by the three main credit bureaus: Equifax, Experian, and TransUnion.
The most common scoring models—FICO and VantageScore—both range from 300 to 850. Experian’s senior director of consumer education and advocacy, Rod Griffin, compares a credit score to a grade received in school. “Your credit score represents the quality of your credit history, like a grade represents the quality of the work you did,” he explains. “Like a grade on a paper, it helps lenders predict the likelihood that you will repay a loan as agreed.”
The higher your credit score, the more trustworthy you are in the eyes of lenders. A good score will give you higher approval odds when you apply for a loan or credit card, as well as the best interest rates and terms. On the other hand, a low credit score makes it harder to get approved for financing at affordable rates. It can also prevent you from getting approved for an apartment, utility account, cell phone plan, and more.
How your credit score is calculated
Credit scores are based on a number of factors, and the exact algorithms used by scoring agencies are largely proprietary. Still, we know that when it comes to FICO scores (the scoring model used most often by lenders) there are five general categories of metrics, according to John Ulzheimer, president of The Ulzheimer Group and founder of CreditExpertWitness.com.
In general, FICO scores are based on the following:
- Payment history (35%): This examines whether you’re paying your bills on time, and is the most heavily weighted factor.
- Amounts owed (30%): This is how much debt you owe in relation to the total amount of…
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