What is a Credit Score?
Credit and having access to credit is essential. When you don’t have a credit history, you may have to pay more interest on loans to be able to qualify for credit. Today’s blog post gives you all the info you need to know about what your credit score means and how a good, or poor, score can affect you.
Lets start at the beginning, your credit score is a 3-digit number that represents the risk a lender takes when you borrow money, simply put your how good you are with money.
What is a FICO® Score?
Actually, there are two types of credit scores. The most well known is called FICO score. FICO stands for the Fair Isaac Corporation and it’s used by credit agencies to indicate your risk to the lender. A FICO score ranges from 300 to 850, and scores that are in the 670 to 739 range are considered to be good credit history.
FICO scores take into account data in five areas to determine creditworthiness:
1. Payment history (35%)
2. Current level of debt owed (30%)
3. Length of credit history (15%)
4. Credit mix (10%)
5. New credit accounts (10%)
The other consumer credit rating credit score that is used is called the Vantage Score. This was developed via a partnership among the top three credit reporting agencies: Equifax, TransUnion, and Experian and uses Machine learning which reportedly generates a more accurate picture of a persons credit. VantageScore considers a score of 661 to 780 to be the range needed to be considered a good borrower.
The Vantage Score is calculated using an average of five weighted factors:
1. Total credit usage, balance, and available credit
2. Credit mix and experience
3. Payment history
4. New accounts opened
5. Age of credit history3
How to Build Your Credit Responsibly
Having a credit history is a part of your overall financial picture. Once you’ve obtained credit, here are some tips on how to build your credit history responsibly.
Make payments in full and on time.
Be sure to pay you’re your monthly bills on time and in full. Late payments have penalties that result in interest charges, fees, and has a negative impact on your credit health.
One way to ensure that you make payments on time is to set up a reminder for your credit card or setting up automatic payments for items like your mobile phone, utility bill, etc.
If you can’t make full payments, try to make the minimum payment on time.
Making no payment on a debt is a double whammy for your credit health. The lender may report a late payment to the credit bureaus, Equifax and TransUnion which can negatively affect your credit posture.
If possible, consider diversifying your credit mix.
When you’re in the early stages of building credit, you may only have one form of credit, like a credit card. But when you’re on your way to having good credit, consider mixing it up with a variety of credit types. These could include a car loan, a line of credit or a student loan.
What Your Credit Score Means
Exceptional Credit Score: 800 to 850
People with this score have a long history of no late payments, as well as low balances on credit cards. Consumers with excellent credit scores may receive lower interest rates on mortgages, credit cards, loans, and lines of credit, because they are deemed to be at low risk for defaulting on their agreements.
Having an exceptional credit score, comes in handy when you are qualifying for a personal loan, as it typically more than makes up for a lack of collateral.
Very Good Credit Score: 740 to 799
People who have a credit score between 740 and 799 is seen as financially responsible. These folks traditionally pay their bills on time including loans, credit cards, utilities, and rental payments, are made on time. People that are in this group, they typically have low credit card balances compared with their credit account limits.
Good Credit Score: 670 to 739
A credit score between 670 and 739 places the borrower close to or slightly above the average of U.S. consumers, as the national average FICO score is 711 as of January 2020.
While these people can earn competitive interest rates, they are unlikely to command the ideal rates of those in ‘Very Good” and ‘Exceptional” categories, and it may be harder for them to qualify for some types of credit.
Fair Credit Score: 580 to 669
Borrowers with credit scores ranging from 580 to 669 are thought to be in the “fair” category. They may have a few red flags on their credit history, but they do not have major delinquencies.
These borrowers are still likely to be extended credit by lenders but not at very competitive rates.
Poor Credit Score: Under 580
People with a score between 300 and 579 has a significantly damaged credit history. This may be the result of multiple defaults on a variety of credit products from different lenders.
People who are looking to secure credit with credit scores that fall in this range typically have a hard time to obtain new credit. How to get out of this? Start by talking with a financial professional about repairing their credit.
The Bottom Line
Having a good credit score and the ability to effectively managing your money can help you in the short and long term.