What Is a Credit Score?

The words “credit score” are used everywhere these days, from tv advertising to banking documents to apps and more. But what do they really mean?

A credit score is a number lenders use to determine how much risk there is if they lend to you –how likely you are to pay the money back on time. You may also hear this called “creditworthiness.”

A lot of factors go into determining your “creditworthiness” and credit score. In this post, we’ll take a look at how credit scores are calculated, what makes a good credit score, and how to find your credit score.

How Credit Scores Are Calculated

Credit scores are based on a lot of factors. These can include:

• Credit history – have you had and paid off credit cards or loans in the past?
• Length of credit history – how long have you been borrowing?
• Repayment history – have you paid on time in the past?
• Number of accounts – for example, do you have 20 open credit cards? Or two?
• Types of loans you have – this may be referred to as your “credit mix,” and can include credit cards, home equity loans, personal loans, mortgages, etc.
• Applications for new accounts
• Debt, especially as a percentage of your income
• Credit utilization – how much you have borrowed vs. how much you’ve been approved for, usually expressed as a percentage. For example, a credit card may offer you a $2000 line of credit, but you may only have a $200 balance on the card. Your credit utilization would be 10%.

These factors are weighted this way to determine your credit score:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• Types of credit (10%)
• New credit (10%)

The credit score was created by the Fair Isaac Corporation, now known as FICO; you’ll sometimes see a credit score referred to as a FICO score. There are other credit ranking systems, such as VantageScore, but FICO is used almost exclusively.

In the U.S., three major credit bureaus report, update and store consumers’ credit histories: Equifax, Experian, and TransUnion. Scores vary some but are fairly consistent across these three providers.

Each provider can give you a “credit report,” an electronic or paper document explaining your score. Regardless of the credit bureau used, your credit report will include your score, a listing of open accounts, an explanation of your debt, and other details. This can help you see where you stand. It also gives you a chance to check the report and dispute anything that isn’t right.

Credit Score Ranges

Credit scores range from 300 to 850. They are provided by three dominant companies in the U.S. – Equifax, Experian, and TransUnion. The higher a person’s score, the more likely they are to be approved for credit, and the better the rates and terms they’ll get from a lender.

Credit score ranges are:

• Excellent: 800 – 850
• Very Good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Poor: 300 – 579
  

What is a good credit score?

A “good” credit score is one that allows you easy access to credit with favorable interest rates and terms. You’ll get the best terms with a credit score in the very good or excellent range: 740 to 850.

The biggest reason a good credit score is important? It saves you money in the long run, and gives you buying power. For example:

• When you lease an apartment, a higher credit score can mean a smaller deposit, or even no deposit at all. Good credit can also mean you don’t need anyone to co-sign the lease.
• When you buy a car, a higher credit score can get you better interest rates, allow you to put less money down, and can get you longer to pay off the loan. With good credit, you usually won’t need anyone to co-sign on your car loan, either.
• When you buy a home, a higher credit score helps you get better terms (for example, length of the loan) and interest rates on your mortgage. You could also be approved for more money.
• When setting up utilities, a higher credit score could mean you don’t have to pay a deposit.
• With a credit card, a higher credit score will make approval for a card easier and may get you a higher credit limit.
• When getting installment loans or personal loans, a higher credit score means lenders will be more willing to lend to you, offer you the best (lowest) interest rates, and may even give you more time to pay. They may also be willing to lend you more money.  (Though there are installment loans for bad credit.)
  

What is a bad credit score?

A “bad” credit score is one that negatively affects your ability to access credit. The lower the credit score, the more difficulty you will have borrowing. If you have bad credit, you won’t be able to get approved as easily, you won’t be able to borrow as much, you will pay higher interest rates, and you may not get much time to pay.

Obviously, this can make life difficult. You may not be able to get approved for a car loan or might be forced to choose a low-priced car. You might pay high interest rates if you get a personal loan, and you might not get much time to pay the loan back.

Credit cards may not approve you, and if you are able to get one, you might have a low credit limit and high interest rates. It could be hard to get accepted as an applicant for an apartment or lease, and you might be forced to choose lesser living arrangements. 

Bad credit can even drive up your insurance rates.

These challenges will affect almost every aspect of life. That’s why maintaining a good credit score, or working to improve a poor one, is so important.

How to Check Your Credit Score

Be sure you know how to check your credit score for free. There are several ways to access a free credit score.

• Use a credit app or website. There are free apps and websites that give you access to your credit score at no charge. The Consumer Financial Protection Bureau suggests www.AnnualCreditReport.com. You can also go to your smart phone’s app store or the web to find a score provider. Choose a reputable option with many downloads and a great user rating. Be sure the app is not a “free trial” or a “paid service,” or you could pay an unnecessary fee.
• Credit card statement. Lots of major credit card companies now include your credit score on your statements. If you don’t see your score on your statement, check the account online or call the card company. You may see your credit score on an auto loan statement, too.
• Non-profit counselor. Contact a non-profit credit or housing counselor trained by the U.S. Department of Housing and Urban Development. These counselors can often provide your credit score for free and may even go over it with you.
• Lenders. At Check `n Go, we show customers their credit score for free on our customer app. Other lenders or banks may provide the same service.

You shouldn’t need to pay to check credit score. Beware any look-alike sites or apps that ask for a payment.

Credit scores are an important tool in managing your financial health and preparing for the future. They aren’t just used for lending. Employers can use them to help evaluate a candidate’s reliability. Landlords may use them to approve or deny apartment leasing applications. Utilities may use them to determine your required deposit. Credit score are involved with a variety of things important to your life. Get a step ahead and learn about how to improve your credit score. Be sure to check your credit score regularly, and work to maintain the best score you can. If you run into trouble, seek help from a credit counselor.