If you’ve seen or heard a lot of ads lately about checking your credit score, you might be wondering what all the fuss is about. Why is having good credit important? And what is it anyway? How can you work toward a higher credit score?
First, when people talk about good or bad credit, it refers to the way an individual has managed (and continues to manage) their personal finances. Their activity is reflected in their credit report as well as their credit score. Here’s the difference:
Your credit report follows the history of your financial activity, including a list of businesses that have extended you loans or credit, the total amount of each loan or credit limits on any credit cards, how often you’ve made on-time payments, and any missed payments. To learn more about your credit report, read PNC My Finance Academy’s “7 Steps to Building Strong Credit.”
Your credit score is a three-digit number generally ranging from 300 to 850 (there are a variety of different scoring models) that serves as a quick reference to help lenders, and other decision-makers considering whether to extend credit or a loan to you, determine how likely you are to repay them on time. The higher your score, the better your credit. Based on information in your credit report, your credit score fluctuates with your ongoing financial activity much like your grades can fluctuate with your test performance.
Who looks at your credit score and credit report? The bank considering your car or home loan application, the landlord or leasing company considering your application to rent an apartment, the cell phone provider giving the thumbs-up or down on your new two-year contract — anyone who needs to decide whether you are financially stable enough to enter into an agreement with them. Sometimes the decision-making process involves more than just a yes or no; good credit often qualifies borrowers for better interest rates than those with average credit, too, which means a good credit score just might save you money.
How can you work toward a strong credit score? Here are a few tips:
- Pay your bills on time, every time. Set up reminders so you never miss a rent, utility, cell phone, car, credit card, or loan payment.
- Start paying off your student loans while you’re in school. If you can, make payments toward your student loans now, because in addition to reducing the debt you’ll face when you graduate, you will demonstrate your ability to repay debt.
- Keep your credit balances low, and pay off your debts as quickly as you can. Keeping your debt-to-income ratio low can be important to your credit score.
- Apply for credit sparingly. While having a credit card or a loan can help you build your credit profile, applying for several at once can be harmful to your credit score. Be judicious in your requests.
- Check your credit reports regularly. You can request a free copy of your credit report once each year from the three major credit reporting bureaus — Equifax, Experian and TransUnion — through AnnualCreditReport.com. Review it closely and report any mistakes to your information or activity to help keep your credit report and score on track.