Credit Score 101: What Is A Credit Score

Key Takeaways: 

• A credit score is a set of numbers ranging from 300 to 850.

• The higher your credit score, the more lenders trust to lend you money.

• There are multiple ways to increase your credit score.

Sure, money talks but so does your credit score. Lenders use credit scores to determine how trustworthy you are, should they have to lend you money. A low credit score will decrease your chances or deny you any loans and credit cards. A high credit score will increase these chances as well as open up many more benefits for being a trustworthy borrower.

What Is A Credit Score

A credit score is a set of numbers ranging between 300 and 850. These numbers represent your creditworthiness. The higher the score, the more lenders will trust lending their money to you. Conversely, with a lower score, lenders will not lend to you.

Your credit history determines your credit score and there are many factors that can affect it. Your credit history is based upon the following factors:

• number of open credit accounts

• total amount of debt

• repayment history

• total amount of credit inquiries

• other factors 

In the United States, there are 3 credit bureaus that dominate the credit score market. Experian, Equifax, and Transunion collect, analyze, and distribute your credit information.

The Fair Isaac Corporation, also known as FICO, developed the credit score model, which is used by many financial institutions today. FICO doesn’t produce credit scores, it is the software that is utilized by the credit bureaus. They simply plug consumer data into the FICO model that produces consumer behavioral data that turn into credit scores.

Recommended Read: 5 Ways to Increase Your Credit Score Without a Credit Card

How Your Credit Score Works For You

Lenders consider you a subprime borrower if you have a credit score of 640 and below. This means that if you are looking to get approved for a mortgage loan, the rates that you will be offered will fall under their subprime mortgage rates. 

Subprime mortgage rates are offered at higher rates than conventional mortgage rates. The added fee is the amount that the lender charges in order to compensate for the risk they took to lend to you.

The lender may also require a bigger down payment, a co-signer, and a shorter repayment term to decrease their amount of risk. 

You are more susceptible to loan sharks with a lower credit score. Loan sharks prey upon those who can not afford to get a loan through a bank. They typically offer loans with low payment amounts but interest rates are marked up by over 300%. 

A credit score of 700 or above results in you paying less interest on the money that you borrow. Anything beyond an 800 credit score is excellent and you pay little to no interest. 

The average FICO score range is:

• Excellent: 800 to 850

• Very Good: 740 to 799

• Good: 670 to 739

• Fair: 580 to 669

• Poor: 300 to 579

Your credit score also plays a major role in whether or not you will have a down payment on an apartment, utility bills, or phone bills.

How Your Credit Score Is Calculated

Experian, Equifax, and Transunion report update, and store your credit information. 

Though each bureau collects a number of different items that determine your credit score, they typically all collect 5 main factors. These five factors are payment history, the total amount of debt owed, length of credit history, types of different credit, and new credit.

Payment history accounts for 35% of your credit score. This shows whether or not you pay bills on time. The total amount of debt owed makes up for 30% of your score. It is also known as credit utilization which takes into account the percentage of credit available that is being used. The length of credit history accounts for 15%. The longer your credit history, the less risk you are to a lender.

Types of different credit account for 10% of your score. Lenders like to see different types of accounts such as credit cards, mortgages, loans, and other revolving credit that may appear on your account. New credit also accounts for 10%. When the account was recently opened plus the number of credit inquiries that you have on your credit report is where this calculation comes from.

Recommended Read: 4 Ways I Increased My Credit Score Nearly 100 Points & How You Can Too

What Increases Your Credit Score

Increasing your credit score doesn’t have to be hard. Paying your bills on time, keeping opened credit card accounts, and cleaning your credit report can quickly increase your credit score.

Some utility companies report to credit bureaus every month hence why paying your bills on time is important. When it comes to credit cards, place a small recurring bill on your credit card and pay it off in full each month.

Never close credit accounts on our credit report. Your FICO is made up mainly of the longest length of credit history that you have. It is the foundation that shows how responsible you are when repaying creditors.

Everyone is entitled to one free credit report per year. Correct any misspelled names, phone numbers, addresses, and job occupations. Small mistakes can and will decrease your score and every point counts. Keep a copy of everything you send to the credit bureaus and be sure to mail everything via certified mail. This ensures that your mail has been delivered because it requires a signature once received. You can order your credit report at www.annualcreditreport.com.

Recommended Read: How I Increased My Credit Score 100 Points

Credit Score Takeaway

Your credit reputation matters. Always pay your bills on time and keep a close eye on your credit report.

Your credit score is a number that is sure to follow you no matter where you go in life. An excellent score saves you money by granting you access to lower interest rates. With a bad credit score, however, you are sure to spend more money than you would with a good credit score.