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What is a credit score?
A credit score is a number that banks and financial institutions use quite a bit. This number determines whether the bank approves you to use a credit card or to take out a loan or mortgage, and this number also determines the interest rate you’ll pay if approved. In short, this number determines your creditworthiness.
Credit scores range from 300 to 850, and the goal is to have a high credit score. This means that you’re an attractive borrower–you’ll likely qualify for a loan or mortgage, and your interest rate will be lower. If you have a low credit score, banks and financial institutions view you as a credit risk.
Many people believe that you have just one credit score; but in fact, you probably have hundreds of credit scores. This is because banks and financial institutions can report your behavior to any or all of the major credit bureaus, and each might have different information about you. For example, Young Americans Bank reports to TransUnion. Other bureaus include Equifax and Experian. Credit scores are based on these individual credit reports, so each report can generate different scores.
In addition, there are also different companies that offer credit scoring models, one of which is called FICO. A FICO score is just one brand of credit score. The reason most people have heard about it is because it’s the most widely used. If FICO were an online retailer, it would be the Amazon of credit scores. It is estimated that 90% of top lenders use one of FICO’s scores in their lending decisions.
If you want to learn more about FICO scores and gain access to your FICO score for free, the Federal Reserve of Kansas City together with FICO staff are hosting a free webinar on June 30th at 11am MT. Register here.
How to improve your credit score
Now that you know more about how credit scores work, it’s important to understand how you can help increase your credit score. The number one thing you can do to increase your credit score is to use credit regularly and responsibly. For instance, if you have a loan, be sure to make your payments on time each month. If you have a credit card, purchase items you can afford to pay back and make sure to pay off your entire balance every month.
Another tactic to improving your credit score is to regularly check it. Checking the score too often can actually lower the score. Review it annually, and you’ll help ensure there are no fraudulent activities (like someone taking out a credit card in your name).
Are you ready for credit?
Did you know that Young Americans Bank offers credit cards? With a starting limit of just $100, these are a great way to start building credit, practicing using credit responsibly. Doing these will help increase your credit score, so by the time you’re ready to take out a loan for a large purchase–say a car or a home–you’ll be able to qualify for a lower interest rate. Talk to a Financial Services Representative on your next visit or give us a call at 303-321-2265 to see if you’re ready for credit!
Pro Tip. You don’t have just one FICO score. FICO has lots of different scoring models. Some lenders use one type of FICO scoring model for credit card applications while using another model for home loans.