Credit scores are three-digit numbers that provide an overview of a person’s financial habits. When it comes to an individual’s credit score, there are three major credit bureaus that manage this reporting—Equifax, Experian, and TransUnion. Credit scores play a major role in finances and beyond, which makes them an important part of financial health and literacy. Below you’ll find everything you need to know about credit scores.
Credit scoring has changed over the years; now, it has become an efficient tool that several financial institutions use to figure out credit risk when lending money. Credit scores are calculated based on a few financial habits. Here are some of the major ones:
All these habits make up your credit history, which, as you now know, will directly impact your credit scores.
Credit reports and credit scores go hand in hand, so when trying to learn more about credit scores, it is important to understand your credit report. All three credit bureaus keep credit reports on consumers who borrow money from businesses and financial institutions. Your credit reports essentially are a record of your credit history that can be pulled to get a better look at things. When you apply for most loan options, lenders will ask for a credit check or inquiry. This will mean that they will pull your credit report to view.
There are several different credit scoring models out. However, the most common is the FICO score and VantageScore. Here are the credit score ranges for these models:
For a FICO scoring model, credit scores range with look like this:
300 to 579: These credit score ranges can be considered poor.
580 to 669: These are regarded as fair FICO scores.
670 to 739: This range is considered good credit.
740 to 799: This credit score range can be considered very good.
800 to 850: Can be considered excellent.
The Vantage credit scoring model will look like this:
850 to 781 is an excellent score.
780 to 661 is a good score.
660 to 601 is a fair score.
600 to 500 is a poor score.
499 to 300 credit score range is a very poor score.
And so, as you can see, you may have multiple credit scores from different credit scoring systems that you can analyze.
As you can see from above, a good credit score for a FICO score is considered anything above 670, while with a VantageScore, anything above 661 is considered a credit score. If your FICO score is good, then chances are that your VantageScore is as well.
Regardless of what model of credit scoring you are looking at, there are similar variables that impact your credit scores. Here are some of the major factors that determine and impact most credit scores:
Payment history has the largest impact on credit scores. How you make payments on your credit accounts will have a huge impact on your credit score. That is why making on-time payments is so important. Missing even a single payment on a loan or credit card can adversely impact your score. On top of that, a missed payment can stay on your credit report for up to seven years. And so, to preserve your credit health, it is essential to make your payments on time.
Amounts owed refer to the amount of debt that you have. In most scenarios, your debt-to-income ratio will be examined to determine how much debt you are juggling. Having a debt-to-income ratio over 40% or so may harm your score.
Another essential ratio that falls into this category is credit utilization. Credit utilization measures the amount of debt you have against the available credit. Generally, it is advised to keep this under 30%. Credit cards, if you have them, can have a significant impact on your credit score. For example, when a credit limit on a card is increased, it adds to your available credit, which can help your ratio. While closing an open credit card account may be harmful as it decreases your available credit. And so, it is important to be extra mindful with revolving credit accounts such as credit cards.
You may not think about this, but the age of your credit accounts plays a role in your average credit score. Older accounts show lenders that you have experience, and they have a lot of history that they can look into if they need it. While with newer accounts, they may not be able to get a significant glimpse into your credit habits. This is another reason other than credit utilization to keep credit accounts open even if they are paid off.
The number of new credit inquiries you have will also impact your credit. In most cases, when you apply for a loan, mortgage, auto loan, or any other kind of installment loan or lending product, your credit reports will be pulled. Having multiple new credit inquiries in a short period of time may hurt your credit score and may seem risky to lenders.
Your credit mix looks at the diversity of your credit accounts. The more diverse your credit is, the better it can look for you. When you have several different kinds of loan types and have been good about paying them on time, it shows lenders that you have experience handling various types of credit accounts.
Along with understanding factors that do influence credit, it may be helpful to also understand some things that don’t impact your credit scores; here are some of those variables:
The most obvious impact of having a good credit score is getting great rates, higher credit limits/more loan funding. However, that isn’t the only thing that your credit score will affect. Here are some other parts of your life that your credit score can affect:
Whether you are looking to rent a place or are thinking about buying a home, your credit score is an important part of the process. With renting, there will usually be a rental application that has a credit check as a part of the process, and with a bad credit score, you may be turned down. With a mortgage, your credit score is a huge part of the approval process and will impact your interest rate.
Many people use financing to purchase important assets such as a car or a home. These types of purchases can help you build wealth and financial stability. Unfortunately, without a good credit score, financing these types of purchases can be challenging. And even if you find funding with low credit scores, you’ll be paying a large amount to finance the purchase.
In some states, employers can check an applicant’s credit scores with permission. In some cases, a bad credit score may mean a potential employer moving forward with another candidate.
If you don’t have the best credit, you may be curious about how you can get a higher credit score. The good news is that there are several avenues you can look into for improving your credit; here are some effective strategies to do so:
Paying Bills on Time — This is one of the best things you can do for your credit! Each payment you make on your loans or credit cards will be reported to at least one credit bureau, and if you make your payments on time, this may really help your credit!
Pay Off Debt — Another thing you can do to improve your credit is to pay off debt, especially revolving credit accounts like credit cards. There are several ways you can go about paying off debt. You can go start slow by paying more than the minimum due. Or you can be more aggressive with debt payment by using strategies like the snowball or avalanche method.
Limit How Often You Apply for New Credit Accounts — Although applying for credit may be a necessity sometimes, it will be important to be mindful of how many credit checks you have, especially in a short period of time.
Become an Authorized User — A primary credit holder can add another person as an authorized user to their credit account. This way, every time the primary user makes on-time payments, which will be reported to the credit reporting agencies, the authorized user will also have that payment history. Keep in mind that any missed or late payments will also be reported, so it is important to really think about whose credit card you are planning to connect with.
Get Your Alternative Payments Reported — Alternative payments can include things like rent, utilities, phone bills, and subscriptions. These are bills that most of us pay on time every month. However, they are not reported to the credit bureaus. Luckily, there are services that you can sign up for, which will mean getting those payments reported.
Checking your credit score and credit reports is actually pretty simple! Everyone can get a copy of their free annual credit report, which will also include your credit scores. You can visit AnnualCreditReport.com to get started with that. Other than those free credit scores, you are able to check your scores often without any impact on credit via soft credit checks; lots of financial institutions also offer a rough estimate of your scores. However, with credit reports, if you want to access them more than once a year, you may have to pay a fee to do so.
It is extremely important to check your credit report often! There are a few reasons for this, including mistakes and identity theft. Mistakes on credit can happen all the time, and it is your responsibility to ensure that those mistakes are noticed and corrected. Having those on there may really harm your credit. With identity theft, your credit reports often will show the beginning signs if this does happen to you. And so, make sure to check your credit reports often.
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