A credit score is more than just a 3-digit number – it is the first thing a potential creditor looks at to determine if you are a reliable borrower. The most widely used credit scoring model is your FICO (Fair Issac Corporation) score. This scoring system was designed to give potential lenders an easy-to-get and uniform way of evaluating your creditworthiness. Potential lenders may understand what your credit score means when looking at it, but do you?
Here are some of the basics you should know about your credit score:
What does the number mean? Your FICO score will range between 300 (lowest) and 850 (the very best). There are three credit bureaus that report both scores and credit report information: Experian, Equifax and TransUnion. While the results will usually be very similar between the three, slight variations in how your score is calculated can result in small differences. These guidelines help in determining what your credit score will tell potential creditors about you.
820 to 850 – Superb credit. This indicates a long and squeaky clean credit history. The absolute best rates are available at this level, and lenders will even seek your business.
775 to 819 – Excellent credit. Will often result in the best lending rates available and favorable credit decisions.
740 to 774 – Very good credit. This score is still well above average. Most lenders will be happy to work with you at favorable rates
710 to 739 – Good credit. Lenders are still likely to work with you, but you may pay a bit more than those with very good credit.
675 to 709 – Average credit. You will qualify for most loans, but will not receive the best rates.
600 to 674 – Below average credit. At this level it becomes more difficult to qualify for a home or car loan. While you are still likely to get approved by most lenders, you will not receive the best terms. Higher interest rates means you will end up paying much more to use credit.
480 to 599 – Poor credit. At this level, you will have a difficult time being approved on your own for credit. Often the only lending options are predatory lenders that will charge exorbitant interest rates and hidden fees resulting in negative cycle of unhealthy credit.
300 to 479 – Bad credit. Credit scores in this range will likely hold you back from receiving any type of credit and can be a red flag to non-creditors such as potential employers who view your report.
NO credit – Thin credit file. Not having enough credit history can result in an inability to determine a credit score altogether. This will also make it difficult to get approved for any type of credit.
So how does a score get calculated, anyway? While the exact formula for calculating your score is an industry secret, the details that go into it are well-known and basically break out as follows:
35% — Payment history. A little more than a third of your score is based on your ability to make timely payments. Payments later than 30 days will lower your score.
30% — Percentage of your available credit being used. In addition to making timely payments, your credit scorealso considers how much of your available credit is being used. When you look at a credit card bill, this will be the difference between the “credit limit” and your “balance due.” To improve this piece of your score, keep your balances well below your limits.
15% — Length of credit history. This gives bonus points to individuals with long, successful credit histories. Sorry, young adults. This means you will need to be patient if your goal is to achieve perfect credit. While you’re building credit history, be sure not to close any of your old accounts.
10% — Types of credit. This piece of your score considers the types of credit you have, for example, installment loans (e.g., a car payment, mortgage or student loan), revolving lines of credit (e.g., credit cards), or consumer finance (e.g., bank). Ideally, it’s considered healthy to have a good mix of all types.
10% — Number of inquiries made on your credit report. Generally speaking, each time you apply for credit or a potential creditor requests your information, your credit score will be lowered 5-7 points. There are a few important exceptions to this, however. When you check your own credit – which we highly recommend – doing so will not impact your score. In addition, inquiries made in a short period of time by auto lenders and mortgage companies will not always hurt your score because you are encouraged to shop around for the best rates you can get.
An important detail to remember is that your credit history, as represented by your credit score, is just one piece of information a lender will need to make a lending decision. While the score is very important, he or she may also consider your income, length of employment, and current assets, as well.
If your credit score is not where you’d like it to be, don’t lose heart. People can and do improve their credit histories. While it takes some time and discipline, the kind of credit score that will help you move your life forward is well within reach.