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About Your Credit Score and Its Importance

Feb 27, 2018 | 4 minute read

About Your Credit Score and its Importance | What is a Credit Score

A credit score is a number generated by an algorithm using information from your credit history representing your creditworthiness. Lenders use credit scores to evaluate the probability that a person will repay their debts. Ranging anywhere from 300 to 850, a higher credit score indicates lower risk.

There are three common credit bureaus (also known as credit reporting agencies) that collect and maintain credit information. The big three in the United States are: Equifax, Experian, and TransUnion.[1]

The credit score model was created by the Fair Isaac Corporation, also known as FICO, the most commonly used credit-scoring systems. You have the right to view your credit report once a year from each credit bureau.

While every creditor defines its own ranges for excellent, good, fair, poor, and bad credit, the following table gives you a general range of numbers that fall into each range.

Credit Score Category

750 & Above Excellent
700 - 749 Good
650 - 699 Fair
550 - 649 Poor
549 & Below Bad

 

Why Your Credit Score Matters

Credit scores help lenders anticipate how likely you are to repay your loan on time. Having good credit is important as it determines whether you will qualify for a loan and the interest rate you will receive for that loan. A good credit score could be the difference between hundreds and even thousands of dollars.

What Affects Your Credit Score

A variety of factors affect your credit score and with different impacts. Below are some of the leading factor:

  • Credit Card Utilization
    This refers to how much of your available credit you’re using at any given time determined by your total credit card balances divided by your credit card limits. Most experts recommend keeping your overall credit card utilization below 30% because the lower usage of your credit suggests you can responsibly use credit.[2]
  • Payment History
    Your history of consistently making payments on time shows lenders and creditors you are reliable and likely to pay back your debts. Late or missed payments can significantly harm your credit score.[3]
  • Derogatory Marks
    A derogatory mark on your credit report is essentially a long-lasting negative record on your report likely due to delinquency or late payments that indicates a credit risk to potential lenders. If you’re facing a derogatory mark, the best thing to do is keep the rest of your credit in good health and wait for those marks to fall off naturally over time.

In addition to those listed above, additional factors that may affect your credit score include: credit mix, length of history, number of accounts, and hard inquiries. Worried about your credit score? It may be worth investing time into raising your credit score. Some measures you can take to help raise your credit score include: ensuring you’re paying every bill on time, maintaining a low credit utilization ration, and using your credit cards responsibly. Your credit score plays a pivotal role in your financial journey, it’s not too late to get started.

 

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[1] https://www.thebalance.com/who-are-the-three-major-credit-bureaus-960416

[2] https://www.creditkarma.com/credit-cards/i/credit-card-utilization-and-your-credit-score/

[3] https://www.creditcards.com/credit-card-news/fico-credit-score-payment-history-1270.php