For most people, credit scores are an ambiguous concept, one which tends to make us a little uncomfortable. You might not be sure where your credit score comes from, what it means, and what you can do (if anything) to improve it. Credit scores can seem judgmental. You may not be sure who’s doing the judging, but you feel judged all the same.
It turns out that credit scores actually have a good practical purpose. They are an easy way for a lender to understand how likely you are to always pay the loan back on time. Lenders lose money from borrower default all the time. Sometimes they can’t get the money back at all, even after pursuing legal action. To account for this risk, the lender charges interest and fees. Together, this represents the Annual Percentage Rate, or APR. The higher the APR, the more expensive the loan. People with low credit scores usually find that loans available to them are very expensive.
But it doesn’t have to be this way. If you could improve your credit score you could have more and better loan options. But that sounds next to impossible for someone who doesn’t really understand how credit scores work. Fortunately, it’s not rocket science. It just takes a little effort and some new habits.
If you’re based in the US, your credit score and credit histories can be seen at AnnualCreditReport.com, a site enabled by the government to let you see your credit score once a year at no charge. You’ll find your credit score, and you’ll see a thorough list of your credit history, especially all the time you messed up. These negative items pull down your credit score. They might represent the time you forgot to pay your water bill, or the time you requested five credit cards in a month. If you’re based in the UK, you can see your credit score here.
You should be asking yourself how long do credit inquiries stay on your credit report. When you ask for credit, you’re asking to borrow money. If you’re asking to borrow money, it looks (from the perspective of lenders and credit reporting agencies) like you can’t afford to live your life on the money you make through your job or other sources. You seem financially vulnerable. Vulnerability is a sign that a person might default on a future loan, so lenders are wary of giving money to people with low credit scores.
There are other actions that cause your credit score to go low. If you have unpaid debts that are past due, this is reflected in your credit score. If you only have a couple of credit cards, but they’re maxed out, this is reflected in your credit score. If you have 25 credit cards, this is too much, and this is reflected in your credit score. If you don’t have any credit history, this is reflected in your credit score.
In general, good credit scores go to those who use money often, but use it wisely. They have healthy debt levels, but they also have savings and investments ongoing. It might take some time, but if you can improve your credit score by becoming more responsible with money, it will make a huge difference on your next loan.