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What is a Credit Score?

May 1, 2017

A credit score is a three-digit representation of how reliable you are at paying your debt.

It is based on a person’s credit history, and is used by lenders to evaluate a person’s creditworthiness. There are numerous types of credit scores out there.

Two of the most commonly used credit-scoring models in the US use a scoring system within a 300 to 850 point range.

  • FICO Score 8 – Developed by the Fair Isaac Company
  • VantageScore 3.0 – Developed by Experian, Equifax, and TransUnion

The more responsible you are with your credit, the higher your score. The higher your score, the better you are at getting approved for loans at lower interest rates.

A score ranging from 750 to 850 can get you the best rates from lenders. This means the borrower pays less money over the life of the loan.

On the other hand, scores ranging from 300 to 597 may not always be approved for credit. Applicants that fall within this range may be required to pay a fee or deposit.

How to Check your Credit Score

The three biggest credit reporting bureaus in the country – Equifax, Experian and TransUnion – are required by law to give you a free copy of your credit report every 12 months.

You can request your free copy here, the official website for getting your credit report.

What Makes a Good Credit Score

Factors considered when calculating credit are:

  • Payment history – 35%

Looks at whether or not a person pays bills on time. This shows the complete history of a person’s payment information including public records and delinquency.

  • Credit utilization – 30%

Looks at the number of open accounts a person has as well as the amount of money owed on each account.

  • Credit history length – 15%

Looks at how long a person has purchased on credit, dating to their first account.

  • Types of credit used – 10%

Looks at a person’s credit mix, including  mortgage loans, car loans, and revolving credit (credit cards).

  • New credit – 10%

 

Shows how many credit accounts a person opens at the same time and the frequency and attempts to acquire new credit accounts.

How People Fared

Here’s a look at what credit scores mean and the percentage of people in the US belonging to each bracket.

  • 800 to 850: Excellent credit – 19.9% of total

People who have excellent credit are eligible for the best mortgage rates available.

  • 740 to 799: Very good credit – 18.2%

Borrowers in this range receive better-than-average rates from lenders.

  • 670 to 739: Good credit – 21.5%

The majority fall under this category. They have an easy time being approved for loans and mortgages and obtain generally favorable interest rates.

  • 580 to 669: Fair credit – 20.2% of people

Borrowers in this range are often viewed as high risk or likely to default on their payments. As such, they are turned down by traditional lenders and become eligible only for subprime loans, which come with higher interest rates.

  • 300 to 579: Very poor credit – 17% of people

Applicants with this type of rating may not be approved for credit or may be required to pay fees or deposits in order to do so.

Simple Ways to Improve your Credit Score

If you’re thinking of buying a house in the future, now is the best time to begin improving your credit score. Here are simple ways to do it:  

  • Settle old debts. As credit history has the highest influence on your credit score, repaying past debts should be your first priority.
  • Maintain a good credit mix. This involves installment loans (car), revolving credit (credit cards), or student loans. A good credit mix makes up 10% of your credit score. However, those who use credit cards responsibly are given better scores than those who don’t have a credit card at all.
  • Establish your credit history as early as possible. A longer credit history is valued by lenders. You can do this by getting a secured credit card, a credit builder loan, a co-signed credit card or loan, or being an authorized user on another person’s credit card.
  • Avoid accruing too much debt. Borrow judiciously and don’t max out your credit card.

Don’t open too many credit accounts at the same time.  It makes you look like you’re in financial trouble.