Think about a time when a friend or
colleague asked to borrow money. The first thing that comes to mind is whether
they can pay you back. Your decision to lend them money depends on their past
behavior and reliability. That’s essentially how a credit score works – it
helps lenders determine if you’re a trustworthy borrower.

A credit score is a numerical
representation of how likely a borrower is to repay a loan. The higher your
credit score, the better your chances of getting approved for credit, while a
low credit score can reduce your chances.

How
a Credit Score is Calculated

Several factors affect your credit score,
but the most prominent ones are:

Payment
history (35%) – Have you paid your bills on time?
Late or missed payments can significantly lower your score.

Amounts
owed (30%) – This factor looks at how much of your
available credit you’re using. Keeping your credit utilization below 30% of
your total limit is generally recommended.

Length
of credit history (15%) – A longer history of
credit provides more data to determine payment habits and is usually considered
less risky.

Types
of credit (10%) – Having a mix of credit types—such
as car loans, mortgage loans, and credit cards—shows lenders that you can
handle different types of debt responsibly.

New
credit (10%) – Opening too many new accounts in a
short period may signal financial distress to lenders and negatively impact
your score.

What
is a Good Credit Score?

Credit scores usually range from 300 to
850, with higher scores being more favorable. Here’s how they are generally
categorized:

800 – 850: Excellent (Top-tier borrower)

740 – 799: Very Good (Low-risk borrower)

670 – 739: Good (Average borrower)

580 – 669: Fair (Subprime borrower)

300 – 579: Poor (High-risk borrower)

How
to Improve Your Credit Score

Boosting your credit score requires
consistency and good financial habits. Here are some effective tips:

·        
Pay your bills on time. Set
reminders to avoid late payments.

·        
Keep your credit card accounts
open. A longer credit history improves your score.

·        
Increase your credit limit. If
your account is in good standing, ask for a higher limit to reduce your credit
utilization ratio.

·        
Check your credit report
regularly. Ensure there are no errors and report any discrepancies immediately.

·        
Reduce your credit card
balances. Keeping your credit utilization low helps improve your score.

How
to Check Your Credit Score

You can check your credit score through the
following sources:

·        
Your bank or credit card
provider

·        
Major credit bureaus such asTransUnion,
or Experian.

Regularly reviewing your credit score helps
you monitor your financial health and detect any errors early.

Maintaining a good credit score is crucial
for financial stability and access to better borrowing opportunities. By
understanding how your score is calculated and taking proactive steps to
improve it, you can achieve better financial health and greater financial
freedom.