credit score 101
The Consumer Financial Bureau Protection defines a credit score as a prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports. It is a numerical representation of your creditworthiness, typically ranging from 300 to 850. It’s calculated using algorithms that analyze information from your credit report, including your history of borrowing and repaying money. Lenders use this score to assess the risk of lending money or extending credit to you.
There are three major credit bureaus — Equifax, Experian, and TransUnion — that collect and maintain credit information. Each bureau generates a credit report consisting of a score based on the data analyzed. While these scores might differ from bureau, they follow similar criteria and serve the same function: to give lenders a snapshot of your credit reliability.
Generally speaking, you can categorize your FICO score into one of these groups:
Less than 580
Between 580 and 669
Between 670 and 740
Between 739 and 799
800 or more
In addition to credit bureaus, there are also different scoring models. The numbers above reflect the most common credit scoring model: the FICO score. It’s calculated by the Fair Isaac Co., also known as the Isaac Corp., and plays a role in over 90% of lending decisions in the U.S.
Several factors can impact a credit score. In general, they all concern what type of debt you take on and how you handle that debt once you’ve acquired it. Here’s a quick breakdown of what goes into it:
Payment history is the most important factor in your credit score calculation. According to Forbes, it is the record of a borrower’s payments on their credit accounts and other debts. It tracks whether you’ve paid past credit accounts on time. Late payments, missed payments, and accounts sent to collections negatively impact your score significantly. A consistent record of on-time payments shows lenders you are reliable and responsible with credit, making you a lower risk.
Credit utilization is the percentage of a borrower’s total available credit that is currently being used. It measures how much of your available credit you’re using at any given time. A lower utilization rate is better for your score; generally, it’s advised to keep your utilization below 30%. This means if you have a total credit limit of $10,000, you should aim to keep your outstanding balance under $3,000. High utilization rates can signal to lenders that you’re over-reliant on credit and might struggle to pay back what you owe.
The length of credit history implies how long you’ve had credit accounts. A longer credit history generally improves your score because it gives lenders more data to understand your borrowing behavior. It includes the age of your oldest account, the age of your newest account, and the average age of all your accounts. Keeping older accounts open and active can positively impact this part of your score.
Credit mix means having a variety of credit types, such as credit cards, installment loans, and mortgages, which can positively impact your score. This shows lenders you can manage different kinds of credit responsibly. However, it’s not necessary to open new credit accounts just for the sake of diversification. Instead, focus on maintaining a balanced mix of credit that suits your financial needs.
New Credits is how many new credit accounts you’ve opened recently. Opening several new accounts in a short period can lower your score because it suggests you might be at a higher risk. Each new credit application typically results in a hard inquiry on your credit report, which can also slightly lower your score. Be strategic about when and why you apply for new credit to avoid unnecessary dings to your score.
By understanding these five factors and how they impact your credit score, you can take proactive steps to manage and improve your credit health. It’s all about maintaining a balance and demonstrating responsible credit behavior over time.
Some factors influencing the score are payment history (35%), credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit inquiries (10%).
When you apply for credit, lenders request your credit score from one or more of the credit bureaus (Equifax, Experian, and TransUnion). The lender then uses this score, along with factors like income and employment status, to evaluate your application and determine terms. A higher score suggests lower risk, leading to better interest rates and terms.
Credit scores can change over time as new information is reported to the credit bureaus, reflecting your ongoing financial behavior. So, while your score today might be different from what it was a year ago, the key is to maintain good financial habits to keep it moving in the right direction.
Credit scores typically range from 300 to 850, with higher scores indicating better creditworthiness.
Higher scores (700+) generally mean easier access to credit, lower interest rates, and better terms. This translates into more savings, and a longer time on mortgages, car loans, and other financial products. Essentially, a high score opens the door to the best financial opportunities.
A good credit score typically falls in the range of 670 to 739 on the FICO scale, which is the most commonly used scoring model. This range is considered “good” because it places you above average and demonstrates responsible credit management.
While not in the top tier, a good credit score still offers many financial advantages, including access to a wide range of credit products and terms.
To access the very best rates and offers, you may want to strive for a “very good” (740-799) or “excellent” (800-850) credit score. This high score will help you to have an easy financial life with lenders giving loan approvals and competitive interest rates
Now the opposite question must be asked. “What is a bad credit score?” will get different answers depending on who you’re talking to, but many lenders would consider anything below 580 bad.
A bad credit score doesn’t just mean that you won’t be able to get a credit card with cool perks. A bad credit score can negatively impact many aspects of your daily life.
A landlord could get nervous about renting an apartment to you if you have a bad credit score. Potential employers could perform a credit check during the application process, and if they don’t like what they see, it could ruin your chances of getting the job.
You have different credit scores because multiple credit scoring models and credit bureaus exist. The three main credit bureaus (Equifax, Experian, and TransUnion) may have slightly different information about your credit history, leading to variations in scores.
Additionally, different scoring models, such as FICO and VantageScore, use unique algorithms to calculate scores, resulting in different numbers even with the same credit report data. There are also industry-specific versions of credit scores, like auto loan scores, that may weigh factors differently.
Despite these variations, your scores should generally fall within the same range if your credit information is consistent across bureaus.
A great credit score can open up a world of opportunities for you. It can help you qualify for lower interest rates on loans and credit cards, making borrowing more affordable. With solid credit, you’ll also see higher acceptance rates for all kinds of loans and financing products.
Additionally, a high credit score may increase your chances of getting approved for rental properties. This can be incredibly important, especially if you live in a competitive housing market. Some insurance companies may also offer lower premiums to individuals with good credit scores.
Overall, maintaining an excellent credit score can help save you significant amounts of money on financing products and even provide you with more financial flexibility.
Improving your credit score takes time and effort, but it’s entirely achievable with the right approach. Here are some key steps you can take to boost your score.
Tip: It’s never too late to repair your credit score. There’s always something you can do to improve it.
CREDIT BUILDER Highlight
– Jason D.
“MoneyLion has had such a positive impact on my credit score and has helped in numerous situations when I needed a little extra cash to get me through till my next payday. I have taken advantage of the Instacash program as well as the Credit Builder Loan program. I have been with MoneyLion for over a year now, and I have to say of all the cash advance apps out there, it is my #1 go to app. I highly recommend it to anyone looking to build their credit or just looking for a little cash to get you through a tough time.“
Jason D., Trust Pilot
