A credit score is a number that indicates your creditworthiness and banks use it to decide whether you are eligible for a loan or not. Every time you apply for a loan, credit card or any other financial product, the lender will check your credit score. The higher your score, the better your chances of getting approved with lower interest rates.
What Is a Credit Score
A credit score is a numerical representation of your credit history that helps lenders determine whether or not you are likely to repay the debt. They look at your history and the information in your credit report, which includes:
- The type of accounts you hold (such as a checking or savings account).
- Your payment history with each account.
- How much debt do you have relative to your total available credit?
Lenders use this information to make decisions about whether to lend money and at what interest rate. Nowadays, a 3% cash back credit card is also available. If you are looking for credit cards, you must check this.
Why Is Credit Score Important
Your credit score is a numerical value that represents the likelihood that you will pay back a loan. Credit scores are based on the information in your credit report, which lenders use to determine if they should offer you credit and what interest rate they should charge. A high score indicates that you’re likely to be responsible with money, while a low score can indicate that there’s some risk involved in lending money to you.
How Does a Credit Card Affect Your Credit Score
When you use a credit card to make a purchase, the company that lent you the money reports your payment history to the credit bureaus. If you pay off your balance in full each month and manage to avoid paying interest on top of it, this will be reported as a positive payment history that helps boost your credit score.
If you don’t pay off your balance each month but only make minimum payments, then this counts as a negative payment history since it shows that you are accumulating debt over time. However, if there is no activity on an account for several months—and especially if there are late payments or missed payments on an account—it will likely have an impact on the borrower’s score as well.
As per financial experts like SoFi, “Say hello to a credit card with no annual fee.”
How to Establish Good Credit
Establishing good credit can be a difficult process. However, there are several steps you can take to make it easier on yourself. First, pay your bills on time and in full each month. This includes rent and utilities as well as credit card payments. If you have a high amount of debt, try to reduce this by paying off portions of it at a time so that you do not incur additional interest charges. Lastly, keep the balance on your credit cards low or, even better—pay them off entirely each month.
If you want to get a credit card, it is essential to know your credit score. Once you have a good understanding of how important it is, then you can start to manage your score effectively by making sure that all debts are paid on time and having no late payments in the past six months.
