If you’ve ever had any questions about your credit score, say no more. We’ve got the answers here in this quick and dirty guide to your credit score!
Your credit score is the numerical representation of your creditworthiness. Creditworthiness is a fancy term to describe how risky you are as a borrower. Are you going to pay back your loans, or are you going to let them go into default, causing lenders to lose their money?
This score ranges from 300 to 850, the higher the better. The score was created by the Fair Isaac Corporation (now FICO) in order to help banks and lenders to determine who they should lend money to. This decreased interest rates for less risky borrowers and increased them for riskier ones.
The actual formula is not public information, and is still owned by FICO. (Also Read: What is a FICO Score)
Your credit is used by various people such as:
- Lenders (mortgage, car, student loan)
- Employers (specifically for jobs where you will be handling money)
- Credit card companies
In fact, each of these people uses a different version of your credit score. So, in a very real way, you have multiple credit scores!
But how many of them can you access? Only three, and you can get them from the credit bureaus themselves.
Companies that show you your credit score give you a very good estimation of your credit score based on information in your credit report.
Want to find out your credit score now? Get The Credit Pros app!
Your score is made of 5 factors
Payment history makes up 35% of your credit score and is the most important factor in calculating your score.
Payment history looks at every payment you’ve made, assessing each one to determine whether it is:
- On time
- Past due
- In default (learn more about loans in default here!)
Past due and loans in default will hurt your credit store, so avoid missing payments like the plague!
Amounts owed makes up 30%
It looks at how much you owe compared to how much credit you have available
Also called credit utilization, this is most relevant when looking at credit card balances, versus your available credit.
The less you owe compared to your available credit, the better. Ideally, you want your credit utilization ratio to be 30% or lower (that is, for every $100 of available credit, you owe $30).
Credit mix makes up 10%
This looks at the different types of credit you have, such as revolving debt, installment debt, student loans, car loan, etc.
The more different types of debt, the better. Having different types of debt indicates that you, as a borrower, are able to manage different kinds of debt in different situations. This makes you less risky.
Length of Credit History
Length of credit history makes up 15% of your score.
Basically, the older your total credit history, the better for your credit score.
This metric is pretty simple, but there’s more to it than you may think. Learn how length of credit history impacts your credit score.
New credit makes up 10% of your score.
It looks at the average age of your accounts, as well as the age of your newest account.
Your credit score has standard ratings. These, given by Experian (one of the big three credit bureaus), are:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
Based on your rating, you will get:
- Lower interest rates
- More favorable terms
- Greater qualifications
So, what happens if you had an 850 credit score? We wrote about that, too. Check it out!
Want to improve your credit score? Check out our article on easy ways to improve your credit score.
Worried about your credit score and think it’s too low? Call The Credit Pros. We will help you repair your credit, help you with financial discipline, and make things easier for you to improve your score. Call us at 1-800-411-3050 today!