When you fill out an application for a credit card, a loan, or insurance, lenders will check your credit score to determine whether to offer you credit. Among the first steps to building good credit starts with understanding credit scores, how they are determined, and why they matter.
Credit scores, explained.
Your credit score is a number, typically that ranges from 300 to 850. It is computed by credit scoring models such as FICO and VantageScore using credit information reported about you by lenders, banks and other financial institutions to the three main credit bureaus—Experian, Equifax, and TransUnion. Your score may also be calculated by industry-specific proprietary scoring models.
You’ll have multiple score and so they may vary, but all scores derive from the data within your credit reports. Reviewing your credit reports regularly will help you understand what you should do to improve your score.
How come my credit score important?
Your credit score can make a difference on your ability to get yourself a loan, a credit card, rent an apartment, and get a mortgage or auto insurance. You credit score also affect the interest rate lenders will offer you. Like a FICO score of 350 is recognized as low (very unlikely to repay), while a FICO score of 850 is considered high (very more likely to repay).
To break it down even more, the median FICO credit score range is 670 to 739, scores from 740 to 799 are considered very good, and any such thing above 800 is excellent. The higher your credit score, the much more likely lenders will offer you better loan terms and interest rates.
Could I have significantly more than one credit score?
Yes. With so many methods to calculate credit scores, it isn’t uncommon to have multiple different scores. For instance, not totally all lenders report payment history in the same manner, may report at different times, and might or might not are accountable to all credit bureaus. Also, depending on the lending situation (i. e., auto, credit card, mortgage, student loan), different credit scoring models works extremely well. Your credit score depends on which credit report and which scoring model was used.
What influences my credit score?
While FICO and VantageScore have different scoring models, they both generally consider similar factors to calculate your scores on the basis of the information present in your credit reports. Have a look at VantageScore key factors and how each influences your score.
Your payment history—whether or not you pay your bills on time each month—affects your credit score above all else. The next most influential factor is your capability to maintain a variety of accounts (credit cards, auto, student loans, mortgage, and so forth ) as time passes, accompanied by your capability to limit the amount of credit you use (keeping revolving balances under 30% of credit limits is ideal). After that, it’s always a good idea to keep your total debt balance low, watch your credit behavior, and be mindful of your available credit. While these last two are considered less influential, opening way too many new accounts prematurely, or opening more credit than you actually need, can still impact on your own score.
What doesn’t affect my credit score?
Your race, color, religion, nationality, gender, marital status, age, salary, occupation, title, employer, employment history, in your geographical area, and sometimes even your total assets aren’t factored into your credit score by any scoring model.
Read up on the common myths about what influences your credit score and be sure you know the important points.
Free copies of your credit reports from each of the three main credit reporting agencies are available through AnnualCreditReport.com.
Checking your credit reports and score regularly is an intelligent financial practice to get involved with. To remain along with your credit health with free credit scoring and credit monitoring services, take a look at Credit Karma, LendingTree, Mint, Nerd Wallet, and Credit Sesame.