Credit Ratings for Beginners: Everything You Need to Know

The national average credit score is 711. This is actually an improvement from previous years. What this means is that Americans are getting more financially responsible.

If you’re unsure of your credit score or what it means, then you’re neglecting your financial health. This can result in a nasty surprise the next time you apply for credit or a loan.

This guide will explain the ins and outs of credit ratings and how you can manage yours.

Credit Rating Scale

Credit scores range from 300 to 850. The higher your credit score rating, the better. Lenders view a higher credit score as someone who is more financially responsible.

Credit Rating Agencies

There are three credit reporting agencies, Experian, Equifax, and TransUnion. Each bureau maintains a credit report file that includes your basic contact information, available credit, current usage, inquiries, and payment history.

Experian uses a report called FICO for reporting credit scores. Within the FICO model, there are five categories.

  1. Exceptional: 800-850
  2. Very good: 740-799
  3. Good: 670-739
  4. Fair: 601-660
  5. Poor: 580-669

Based on this scale, the average American credit score is “Good”. However, you shouldn’t focus on what the averages are. The only score that matters is your own.

You can request your full credit report from any of the three bureaus once a year for free. You can also make an account and monitor your credit score throughout the year.

While your credit report aims to provide a complete picture of your financial health, there are a few things that aren’t included.

  • Non-debt financial information
  • Employment information
  • Public records
  • Medical information
  • Expired information

How Credit Ratings Affect You

The better your credit score, the more financing options you have available to you. Lenders tend to give lower interest rates and the best terms to those with higher credit scores.

Some lenders will only work with borrowers who have a score within a specific range. Others will only lend to those who have a strong payment history.

You Can Fix Your Credit

If you’ve run your credit and find out that your score is lower than you’d like, all is not lost. The next step is to look for more information about improving your credit score. It’s smart to take steps to improve your score before you seek out a loan or mortgage.

Start by correcting any mistakes on your credit report. You can do this through the credit bureaus. Be sure to correct mistakes on all three reports.

Make payments in full and on time. This will improve your credit utilization score by reducing your total debt. If you can’t afford your monthly payments, negotiate with the creditor or lender for a lower monthly payment.

Become a Credit Rating Expert

Managing your credit ratings can seem like an overwhelming prospect, but once you get the hang of it, it’s pretty simple. The key is to know what’s on your report, don’t borrow too much, and pay your bills on time. Remember that no matter how bad your current situation is, you can always fix it.

Check out other finance articles for more helpful explanations and advice to help you make smart money decisions.

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