Credit score is used by lenders, including banks providing mortgage loans, credit card companies, and even car dealerships financing auto purchases, to make decisions about whether or not to offer your credit (such as a credit card or loan) and what the terms of the offer (such as the interest rate or down payment) will be.
What is a Credit Score?
A credit score is a number between 300-850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.
For a score with a range between 300-850, a score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most credit scores fall between 600 and 750. Higher scores represent better credit decisions and can make creditors more confident that you will repay your future debts as agreed.
Let’s look at this video on basics of Credit Scores from Mashable
What is FICO Score?
One of the most well-known types of credit score are FICO® Scores, created by the Fair Isaac Corporation. FICO® Scores are used by many lenders, and often range from 300 to 850. A FICO Score of 670 or above is considered a good credit score, while a score of 800 or above is considered exceptional.
Check FICO Score here
FICO Score Ranges:
|300-579||Very Poor||16%||Credit applicants may be required to pay a fee or deposit, and applicants with this rating may not be approved for credit at all.|
|580-669||Fair||17%||Applicants with scores in this range are considered to be subprime borrowers.|
|670-739||Good||21%||Only 8% of applicants in this score range are likely to become seriously delinquent in the future.|
|740-799||Very Good||25%||Applicants with scores here are likely to receive better than average rates from lenders.|
|800-850||Exceptional||21%||Applicants with scores in this range are at the top of the list for the best rates from lenders.|
Why Credit Scores Matter?
Credit scores are decision-making tools that lenders use to help them anticipate how likely you are to repay your loan on time. Credit scores are also sometimes called risk scores because they help lenders assess the risk that you won’t be able to repay the debt as agreed.
Having good credit is important because it determines whether you’ll qualify for a loan. And, depending on the interest rate of the loan you qualify for, it could mean the difference between hundreds and even thousands of dollars in savings. A good credit score could also mean that you are able to rent the apartment you want, or even get cell phone service that you need.
Think of your credit scores like a report card that you might review at the end of a school term, but instead of letter grades, your activity ends up within a scoring range. However, unlike academic grades, credit scores aren’t stored as part of your credit history. Rather, your score is generated each time a lender requests it, according to the credit scoring model of their choice.
Every time you set a major financial goal, like becoming a homeowner or getting a new car, your credit is likely to be a part of that financing picture. Your credit scores will help lenders determine whether or not you qualify for a loan and how good the terms of the loan will be.
However, credit scores are usually not the only things lenders will look at when deciding to extend you credit or offer you a loan. Your credit report also contains details which could be taken into consideration, such as the total amount of debt you have, the types of credit in your report, the length of time you have had credit accounts and any derogatory marks you may have. Other than your credit report and credit scores, lenders may also consider your total expenses against your monthly income (known as your debt-to-income ratio), depending on the type of loan you’re seeking.
Factors That Affect Your Credit Scores:
The information that impacts a credit score varies depending on the scoring model being used. Credit scores are generally affected by elements in your credit report, such as:
- Payment history for loans and credit cards, including the number and severity of late payments
- Credit utilization rate
- Type, number and age of credit accounts
- Total debt
- Public records such as a bankruptcy
- How many new credit accounts you’ve recently opened
- Number of inquiries for your credit report
Credit Scores Do Not Consider the Following Information:
- Your race, color, religion, national origin, sex or marital status (U. S. law prohibits credit scoring formulas from considering these facts, any receipt of public assistance or the exercise of any consumer right under the Consumer Credit Protection Act.)
- Your age
- Your salary, occupation, title, employer, date employed or employment history (However, lenders may consider this information in making their overall approval decisions.)
- Where you live
- Soft inquiries. Soft inquiries are usually initiated by others, like companies making promotional offers of credit or your lender conducting periodic reviews of your existing credit accounts. These inquiries do not impact your credit scores.
What to Do If You Don’t Have the Credit Score:
In some cases, you might not have enough credit history to have the credit scores. Depending on your age, there are several ways to establish credit.
If you are under 21, you must have a cosigner or be able to demonstrate that you have an adequate source of income to pay back any credit that is extended. With responsible usage, a parent cosigning a credit card (or adding you as an authorized user to one of their accounts) is a great way to help establish a positive credit history.
For others, the best way to establish credit may be to work with your bank or credit union to open an account with a small credit limit to get you started. Opening a secured credit card is another way to get started building your credit. Then, with time and good account management, a good credit history (and scores) will be within your reach
You can check your credit score for free here