In our daily lives, there’s a lot of numbers we need to keep track of. Phone numbers, anniversaries, and passwords. It’s time to add your credit score to the digits to keep in mind. When it’s time to apply for a loan or a new credit card, your credit score can make all the difference.
According to FICO (the company that created credit scores) 90% of all lending in the US uses FICO scores. But what is a credit score? Don’t worry, we’ve got you covered.
But what is a credit score? Don’t worry, we’ve got you covered.
What is a good credit score?
Credit scores are 3-digit numbers between 300-850 (or zero if you have no credit) that lets banks and other financial institutions know if you’re a good candidate for several services. The best credit score you can have is 850. Don’t worry if your score is lower --- only 1.5 percent of scorable American consumers earn a perfect 850.
Wondering where you might fit in? Credit score ranges are categorized as follows:
- Poor credit: 300 - 579
- Fair credit: 580 - 669
- Good credit: 670 - 739
- Very Good credit: 740 - 799
- Excellent credit: 800+
Not sure what your current score is? You can always check using the official myFICO.com website or one of the three major reporting agencies - Equifax, Experian or TransUnion.
As you can see in the infographic above, your credit score can have a direct impact on how much your monthly mortgage payments are. It will also cause car loan payments to be higher and may keep you from qualifying for certain credit cards and even some bank accounts.
What goes into a credit score?
Credit scores are formed from information on your credit report. Credit reports contain information about your bill payment history, loans, current debt and other financial information.Your credit score is based on five main factors:
- Payment history: (35% of score) Do you pay consistently and on-time on student loans, car loans, mortgages, etc.? The score takes into account how often you miss payments as well as how recent or severe the missed payment was.
- Credit Utilization: (30% of score) This is a fancy way of saying, of the credit available to you, what percentage are you actually using. They ideal here is to carry smaller balances on your credit cards and avoid getting too close to your credit limits. There's no official percentage you have to aim for, just be aware that maxing out credit cards or getting too close to your overdraft limit can make a difference in your score.
- Applications for new credit accounts: (10% of score) How often do you apply for new lines of credit? You don't want to open too many accounts at the same time as it may suggest that you are in financial trouble. Also, too many new accounts lower the overall average age of your account and might harm your credit score.
- Types of credit: (10% of score) What is the variety of credit you hold? This is the balance of old credit cards and accounts versus the number of new accounts that you've opened. Lenders are looking to see a good mix of revolving credit (ex. - credit cards, lines of credit) and installment loans (things paid over time like car loans, mortgages, etc.)
- Length of credit history: (15% of score) How long have you held credit? You don't have to have a long history of credit to get a high score, but you will have to start using credit and try to keep the same accounts for a few years.
Other personal factors such as race, religion, gender, income and employment status will not affect your score.
When it comes to having an outstanding credit score, it’s all about balance. Remember, your credit score is a tool for lenders to determine whether you’re a good candidate for a loan. Therefore, if you’ve never had a credit card or have never taken out a loan, it will be difficult for you to borrow a large sum (with a low interest rate) in the future.
Still, there are plenty of ways to establish and build your credit especially if you are just starting out and have no credit history.
For a quick overview on credit scores and how they work, check out our video below: