A credit score is an integral part of your financial life, and we all have one. From using your credit card at a store to taking a loan, your financial actions are included in your credit score. So, what exactly is your credit score, and why does it matter?
What Is A Credit Score?
Your credit score is a number that usually ranges from 300 to 850. This number is used to determine the likelihood of you paying bills or repaying a loan.
In order to calculate your score, credit-reporting agencies (credit bureaus) gather information on your credit accounts, such as the types of loans you've taken and how quickly you repaid them. After gathering that data they include it in your credit report. Three of the biggest credit bureaus include Experian, Equifax, and Transunion.
Keep in mind that no one has a single credit score. You typically have a few that differ slightly. The reason for this is that your scores are calculated by multiple companies.
While 850 is the highest credit score you can achieve, you do not have to worry about attaining it. This is because having an excellent credit score is just as good as having a perfect one (850).
You will still be able to enjoy similar benefits with both scores. Therefore, you should be satisfied with just having an excellent score because at the end of the day, these scores change often, and you can't expect to have 850 all the time.
Credit Score Ranges
You will typically find varying score standards based on the creditors. However, there is a general idea of what most creditors would use. Here is a list of that general standard.
- 720 and above: Excellent credit
- 690-719: Good credit
- 630-689: Fair credit
- 629 and below: Poor credit
Note that your credit score is not the only information that helps creditors decide on your application. They may also consider your income and other present debts.
How Credit Scores Work
As mentioned, scoring models vary, but most credit scores are made using information from the three biggest credit bureaus (Experian, Equifax, and TransUnion).
Credit reports consist of the following information
- How much credit you can access
- Credit types you have
- How much credit you've borrowed
- If you make timely payments on your debts
- How old your accounts are
However, while these are standard factors in assessing your score, they are not the only ones.
The three big credit bureaus have various scoring models unique to their establishment, which is why you typically have varying but slightly similar scores.
That said, most lenders opt for FICO's scoring method. The company uses over 60 scoring models based on the loan type you want. An alternative to FICO is VantageScore, which has similar scoring models but ultimately differs.
It is up to the lender to decide which credit score they want to use to determine your creditworthiness. For example, you might apply to CreditNinja for a loan and get it, but apply somewhere else and be denied.
Why Credit Score Matters
A great score offers numerous benefits, including amazing values on a mortgage, insurance premiums, loans, cell phone plans, and others.
Without a good score, you might miss out on some of the best deals or end up paying more for your plans. Some areas where having a good credit score can help include:
- Auto loans
- Rental applications
- Car insurance
- Credit card approval
- Business loan approval
Seeing as credit scores play a vital role in your finances, it is best to understand how they work and why they matter.
This way, you can actively take measures to ensure you maintain or even increase your current credit score. Great credit is important, regardless of income or age.
How To Improve Credit Score
Improving your credit score is possible, but it might take a while. Several factors affect your credit score. For the most part, all you need to do is make timely payments, avoid new debts, and pay any outstanding balances. You should also try to keep your credit card balance below 30% of its limit.
Another thing you can do is to avoid applying for a lot of loans around the same time. This is because whenever you apply, the lender does something called a "hard pull" on your credit. A hard pull temporarily affects your score, and if it is done severally around the same period, it could seriously damage your score.
Your credit score is a three-digit number that informs lenders whether giving you more credit is a good risk. Typically, a credit score ranges between 300 and 850, with a higher score showing lenders that you are trustworthy. Without a decent credit score, getting loans, good interest rates, and affordable premiums could be challenging.