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Credit Basics: What Is a Credit Score?

A credit score is a three-digit number assigned to your credit profile that represents your creditworthiness to lenders. While those numbers may seem arbitrary, it has a huge impact on nearly every major area of your life. Whether you’re buying a car...

A credit score is a three-digit number assigned to your credit profile that represents your creditworthiness to lenders. While those numbers may seem arbitrary, it has a huge impact on nearly every major area of your life. Whether you’re buying a car or renting an apartment, your score will determine whether you get approved for credit or services.

What Is a Credit Score?

There are many different credit scoring models and, depending on the platform, your credit score will range between 300 to 850. The two most popular credit scoring platforms creditors use are FICO and VantageScore models.

Why are credit scores important?

No matter which platform your score is calculated on, they all have the same goal: to help creditors and lenders (including landlords, utility companies, and insurance companies) determine how likely you are to manage and pay your bills on time.

Higher scores open doors to financial opportunities and lower interest rates. A low score can prevent you from getting credit and cost you money due to higher interest rates. Even landlords, insurance, and utility companies will use your score to decide whether to extend services to you.

How is a credit score calculated?

Your personal credit scores are calculated using proprietary scoring models based on the information contained in your credit report.

Your credit report is a comprehensive breakdown of your credit borrowing history, as collected by credit bureaus like Equifax, Transunion, and Experian

A credit report contains the following:

      • Personal information about you - full name, past and current addresses, and past and current employment.
      • A list of every lender that has ever extended credit to you.
      • Whether you’ve paid your bills to those lenders on time or not.
      • How much credit is available to you and how much of it you’re using.
      • How many times your credit report has been accessed and by whom (lenders, insurance agencies, landlords, etc.).

Because your credit score is directly affected by your credit report, it’s important to know what is on your report and make sure there are no errors. Unfortunately, errors in credit reports are common and will needlessly affect your score.

Factors That Affect Your Credit Score

Your score fluctuates every month based on your financial habits. And because each credit platform calculates scores differently, you’ll have multiple different scores at the same time. Trying to understand the different types of credit scores and keep up with ever-changing credit scoring models can distract you from what’s important when it comes to managing your score. Your goal should be to get your score as high as possible.

Here are the factors that affect your score:

  • Whether you pay your payments on time or not.
  • How many credit accounts you have open versus closed.
  • How much available credit you’re using (credit utilization ratio).
  • The length of your overall credit history.
  • The different types of credit on your report (credit cards, car or home loans, personal loans, student loans, etc.).
  • How many times your credit has been pulled by creditors.

Both FICO and VantageScore use different models to calculate an overall score. For instance, 35% of your overall FICO score is based on payment history, while 30% is based on how much debt you owe. That makes 65% of your total score based on whether you pay your bills on time or if you’ve maxed out available credit.

If you’re constantly paying your bills on time and not using all available credit, your score is likely to be higher than if you’ve missed a payment or two.

Tips on Improving and Maintaining a Good Credit Score 

Because it’s unlikely you’ll know exactly which scoring model a lender will use, it’s best to concentrate on getting your score as high as possible.

Depending on the platform, credit scores are categorized as such into the following ranges, according to Fico:

  • Exceptional (800-850)
  • Very good (740-799)
  • Good (670-739)
  • Fair (580-669)
  • Poor (300-579) 

Remember, your credit score is always changing. If you have a low score you can use these tips to improve it throughout the year:

  • Pay your bills on time, on or before the due date.
  • Keep credit utilization low, less than 30%. Try not to use all your available credit and reduce debts as much as possible.
  • Avoid opening unnecessary credit accounts. Too many inquiries on your credit report will lower your score.
  • Try to have a varied mix of credit accounts. A credit profile with one or two credit cards and a loan looks better than a profile with only credit cards.
  • Try not to close credit cards after paying them off. Closing a credit card (especially one you’ve had a long time) can hurt your score because it reduces the amount of credit available to you and reduces the overall age of your accounts. 
  • Get a copy of your credit report. Ensure all information on your report is accurate. Fix any errors as soon as you can.

Your credit score follows you wherever you go; it can either cost you money or save you money. Working to improve your financial habits will raise your score and help you maintain a high score so you can access more credit, better interest rates, and services.


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