Whether you are applying for student loans, or trying to get a mortgage, your credit score is a vital piece of information. Having a good credit score can mean the difference between being accepted or rejected for a loan, and it can influence things such as repayment terms and interest rates. While most people can acknowledge that having a high credit score is important, they may not be able to explain what exactly a credit score is, how it is calculated, or what affects it. We have put together a quick guide to answer all of these questions and more about your credit score.
What is a credit score?
A credit score is a three-digit number, on a scale of 300-850, that tells potential lenders how likely you are to pay back a loan based on your past financial behavior. This is referred to as “creditworthiness” and can have a major impact on if you can qualify for loans as well as what the terms will be.
What does my number mean?
While there are multiple financial institutions that can provide you your credit score, there are four consistent ranges that it will fall into that can give you a general idea of where you stand in the eyes of a lender.
- 300 to low 500s – Poor
- Mid-500s to mid-600s – Fair
- High 600s to low 700s – Good
- 720 and to 850 – Excellent
There are many companies that can provide you your credit score for free. It is very important to keep track of your credit score.
What makes up a credit score?
There are multiple factors that make up your credit score, and it is necessary to understand all of them as they each play a role in having a high score.
One of the best ways to raise, and maintain, your credit score is to pay all of your credit and loan payments on time. While a late payment won’t completely destroy your credit, numerous late payments make you more of a risk in the eyes of a lender.
Amount of credit used:
The amount of credit you are currently using compared to the total amount you have is a huge factor in your credit score. By keeping your total amount of credit used to under 30%, you are showing lenders that you take credit seriously and you aren’t relying too much on borrowed money.
Having derogatory marks:
A derogatory mark on your credit, such as bankruptcy or an account in collections, is a huge negative to your credit score. These types of marks can take up to seven to ten years to clear from your history and can make lenders wary of working with you.
Age of credit accounts:
While the average age of your credit accounts isn’t a huge part of your credit score, it still gives lenders a longer history to go on and shows them that you are responsible and reliable.
Total number of accounts:
Another small factor that is considered for your credit score is the total number of credit accounts you have open. It can be beneficial to have a variety of credit accounts, to show you are able to manage multiple types of credit, but too many can be a negative.
Why your credit score matters.
Your credit score is an important piece of information that is used by lenders to determine your creditworthiness. Whether you are applying for student loans, a mortgage, an auto loan, or a credit card, lenders use your credit score to predict if you will pay the loan back, as well as what the interest rate, credit limit, and repayment terms will be.
Taking steps to improve your credit score now will pay off exponentially in the long-term!