Here’s our guide that will help you understand your credit. You may need your credit score explained since it’s important for your personal finances. Millions of people need it to secure auto loans and other debts for life’s necessities.
What’s more, you should familiarize yourself with the various types of credit ratings and their respective scoring models.
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What is a Credit Score?
That three-digit number found on your credit report is called a credit score. It’s a number calculated based on criteria set by the major credit bureaus. They are TransUnion, Equifax, and Experian, and they’ve created these rating systems to help lenders assess borrower credit risk.
Things that can impact credit score include paying your bills on time, minimizing your debts, and other financial matters.
These scores range from 300 to 850 and are derived from certain factors. These include your payment history, credit utilization, age of credit, credit mix, and new credit. Generally, credit ratings increase when you pay your bills on time and avoid taking out new ones.
After all, your credit rating must explain itself and encourage your lender to take the risk of handing you a loan.
Credit Score Explained: Why It’s Important
Building your credit is important for numerous reasons. Particularly, your score determines the loan terms and conditions you’ll receive.
For example, your credit card issuer may grant you loans with lower interest rates. It also determines the terms for other products such as your smartphone payment plan.
Consequently, you need your credit score explained, so you can improve and maintain it. Learn what credit rating your lenders follow, then check the factors behind them. You will then be able to enhance the most important ones and improve your score.
In addition, you must keep your personal information secure from identity theft, so no one can ruin your credit.
3 Different Credit Scores
To better understand the explanation of your credit rating, you need to know the different types.
The most commonly used credit ratings are the FICO score and the VantageScore.
FICO has been used since 1989, and other credit rating models have been created since. These include the VantageScore that was created as its competitor, along with others for more specific uses.
Ever since, we continue to improve credit ratings such as FICO scores, versions 8 and 9 being the latest.
The Fair Isaac Corporation (FICO) score is one of the most trusted credit ratings over the years. It’s commonly used to identify borrowers who are likely to repay on time and filter out those who aren’t.
It’s the original credit rating using the 300 to 850 rating range and the five factors mentioned earlier.
Chances are, your creditor uses this system, so it’s best to know more about it.
It emphasizes payment history, measuring your late and diligent payments. Occupying 35% of your score, you can raise it significantly by submitting monthly payments punctually.
At 30%, credit utilization refers to the ratio between your unpaid balances and your credit limit. You should pull it down to 30% or lower in order to maintain healthy credit.
Next, 15% of your credit score relies on how long you’ve owned your credit accounts and paid them diligently. Also, credit use makes up 10% of your credit rating. Paying various kinds of debts punctually boosts this factor since it shows how well you can handle loans.
Lastly, the last 10% improves with new credit, but too many could get your personal loan rejected again.
Eventually, the major credit bureaus decided to provide competition for the FICO score in the form of the VantageScore.
It has similar factors and rating range, but it provides a letter grade along with the score. It has also seen many iterations, such as the VantageScore 3.0 and its newer 4.0 upgrade.
Other Credit Scoring Models
There are other credit scoring systems that suit certain purposes better than the mainstream ones. For example, Equifax has its own credit score explanation that reports the general credit position of borrowers.
Unlike other ratings, lenders don’t use it to analyze credit reports. Nevertheless, you should understand what credit rating your lender uses.
What is the Highest Credit Score?
The credit range is usually from 300 to 850, so the highest is around 850. However, some credit scoring models may have a threshold lower or higher than 850.
Credit ratings have different rules, and they modify them with each new version. Be aware of these changes so you can improve your credit accordingly.
What is the Average Credit Score?
Credit ratings also have different average ratings, so you should check those as well. For instance, mortgages could accept your 620 credit score.
However, it’s usually best to have a higher score than the average, so you won’t get your personal loan rejected again. If you can, boost your credit rating first before reapplying.
How to Check Credit Score
You can get your free credit score online since you can always get the report with no charge. It’s considered a soft credit inquiry, so don’t worry about hurting your credit rating.
However, be wary of imposter sites and fraudsters on the internet. Only consult legitimate credit reporting companies in order to avoid identity theft.
Your credit rating is crucial to personal finance, and understanding yours will improve your money management. It will also allow you to access vital products and services with the best offers.
Check the underlying factors in your credit rating and improve them. Once you’ve understood your credit rating, you must then enhance it.
Learn More About Credit Scores
How can I check my credit score for free?
You can check annualcreditreport.com and credit reporting companies for your free credit rating. Just provide the required info, and protect your personal details while requesting the report.
What is the minimum credit score for a mortgage?
The minimum credit rating for mortgages can go as low as 620, but your lender may have different requirements. Ask them how you can better qualify for a home loan.
What is the lowest credit score to buy a house?
Some mortgage lenders can grant you a home loan with a 620 credit rating. However, you should ask your lenders if they have different requirements.
Which of the 3 credit bureaus is most important?
No credit bureau is most important since the top three share a similar purpose. They perform similar tasks and scoring methods, and they usually just differ in the timing of your credit report updates.