Your credit score is a three-digit number used to predict the likelihood that you will pay your credit obligations on time. Scores generally range from 300 to 850 and are calculated using credit history information from your credit report.
Your account, payment history, and questions about your credit are examples of credit report information used to calculate your credit score.
How Your Credit Score Is Used
When you apply for a credit card or loan, the lender or lender uses your credit score to inform their decision whether to issue your credit or not. A credit score gives you an idea of how reliable you are as a borrower, allowing lenders to know whether or not you are at risk for either a loan or a credit card.
However, lenders are not the only ones checking credit scores. Your utility company, landlord, and cell phone company can all check your credit score to get an idea of how reliable and financially stable you are.
Creditors and lenders also use your credit score to set prices and terms for your credit card or loan. Having a higher credit score will help you qualify for lower interest rates on credit cards and loans. Having no credit history or a lower credit score will result in a higher interest rate offering, which is ultimately more expensive.
These higher interest rates are designed to lower the risk lenders take by offering loans or credit cards to less reliable borrowers.
How Many Credit Scores Do You Have?
While there are several different versions of the credit score, the most commonly used version is the FICO score. Developed by FICO, formerly Fair Isaac Company, the FICO score is used by many lenders and lenders to decide whether to extend credit to you or not. According to myFICO.com, the consumer division of FICO, there are at least 10 different FICO scores that are used for various purposes.
The VantageScore, created by three credit bureaus, is another common credit score. Many free credit score services offer VantageScore 3.0.
What is a Credit Score?
Because some parts of your bill payment history are more important than others, different parts of your credit history are given different weights in calculating your credit score.
While the specific equation for generating your credit score is proprietary information held by FICO, we know what information was used to calculate your score.
What Makes Your FICO Credit Score?
Payment history: Lenders are most concerned about whether or not you pay your bills on time. The best indicator of this is how you have paid your bills in the past.
Late payments, bills, debt collection, and bankruptcy all affect the payment history portion of your credit score. The better your history of paying debts—such as loan payments or credit card bills—on time, the higher your credit score.
More recent delinquencies hurt your credit score more than those in the past.
Amount of debt: The amount of debt you have in comparison to your credit limit is known as credit utilization. The more money you have, the less flexible your spending will be, which makes it more risky for you to take on new debt, which lowers your credit score.
Keep your credit card balance at around 30% of your credit limit or less to improve your credit score.
Long credit history: Having a longer credit history is advantageous because it provides more information about your spending habits. A longer loan history means your score will be higher.
Keeping the account open for a long time will result in a higher credit score. However, you can still have a high credit score, even if you are a new borrower, if you have a low amount of debt and a history of on-time payments.
New credit: In general, people who open many new credit accounts in a short period of time are seen as riskier borrowers. Too many applications for credit can mean that you are in a lot of debt or that you are in some kind of financial trouble.
Credit mix: Having different types of accounts is advantageous as it shows that you have experience managing credit mixes. This is not a significant factor in your credit score unless you don’t have a lot of other information on which to base your score.
Opening a new account can damage your credit score by adding new questions to your credit report or lowering your average credit age. Open new accounts when you need them, not just to get a better credit combination.
How to Check Your Credit Score
Checking your credit score helps you predict how borrowers will view your application for a credit card or loan. If you notice that your credit score is lower than you would like, you have the opportunity to improve your score before you take major financial steps, such as applying for a mortgage.
Avoid sites that claim to provide a free credit score if they mention a trial subscription or ask for your credit card information. You may be billed within a few days if you don’t take action to stop your trial.
You can check your own credit score, and you must, through one of a variety of services. There are sites online that offer free credit scores. If you have a checking account, many banks will also offer customers the opportunity to monitor their credit scores through their online accounts.