Many people use credit cards as a means of filling in the gaps before the next paycheck so that they can pay their bills on time. Those who use credit cards this way have a better understanding of why credit scores are essential.
A higher credit score puts you in the lender’s favour, thus giving you more opportunities such as lower fees, discounts and cashback. Individuals with lower credit scores find it more challenging to secure credit, and you will have limited options if you do get your foot in the door. You need to understand how the FICO credit score system works if you wish to improve your credit score.
What is the FICO credit score system?
It is a point system used to determine an individual’s creditworthiness. The higher a person ranks in the point system, the better their credit score. Below is a category guide used to determine where one stands in the FICO credit score system.
- Very Poor: 300-579
- Subprime: 580-669
- Average: 670-719
- Very Good: 720-779
- Exceptional: 780-850
It is easier to secure a credit card loan if you have a higher score. If your score is low, then securing credit depends on whether your lender has a high or low-risk tolerance. Nevertheless, your lender will still refer to your credit score through the FICO system and credit report. The lenders source the credit score data from credit bureaus such as TransUnion, TransUnion and Equifax.
It is wise to check your credit score before you apply for a credit card loan or a new credit card. The Fair Credit Reporting Act (FCRA) allows people to check their credit reports once a year. You can also access the same information from your lender if you already have a credit card. Your goal should be to build and maintain a healthy credit score.
You can build your credit score by using your credit card regularly where you close in on the limits and also ensure that you make timely payments. Reducing the balance drastically every month also allows the credit score to improve. Maintaining this discipline will allow you to maintain a healthy and robust credit score.