What Does Your Credit Score Mean?
Have you ever wondered exactly what your credit score actually means? A large amount of the population knows about credit but doesn’t really understand how it actually functions or how it is calculated. If you are aiming to improve your credit score, it is important that you first understand how the credit scoring system works so you can be more effective.
Credit scoring was invented by the Fair Isaac Corporation, otherwise known as FICO. There are other credit scoring systems, but the FICO score is the most common system used by financial institutions.
Your credit report and calculated score is a huge deciding factor for lenders when they are considering whether or not to offer you credit of some kind. If you have a subprime or poor credit score, then you will likely have trouble getting approved for the loans or credit cards you want. And this is why your credit is so important to your personal finances.
Credit Score Factors
Five factors from your credit report are take into account when your number score is being calculated. Each factor holds a different weight in the calculation.
- Payment History
Your payment history reflects whether you have payed your bills on time and with consistency throughout your credit history. This helps establish you as a reliable borrower that pays your debts. This accounts for 35% of your score calculation.
- Total Amount Owed
This includes all different forms of credit, not only your credit cards. Mortgages, student loans, auto loans, medical debt, etc. This accounts for 30% of your score calculation.
- Length of Credit History
When you have an older and more well-established credit history, then you will be considered more responsible. This section reflects how many years you have been a borrower and accounts for 15% of your score calculation.
- Types of Credit
If you have multiple types of credit this shows a level of variety in your borrowing practices. It is helpful to have a healthy mix of installment credit in the form of loans and revolving credit in the form of credit cards. This accounts for 10% of your score calculation.
- New Credit
New credit shows how many new accounts you have, how many recent credit inquiries you have made, and when your latest account was opened. This accounts for 10% of your score calculation.
Credit Score Ranges
The typical range divisions are as follows:
300 – 629
If you have a credit score in this range, then you have bad credit. This low of a credit score can make it very difficult to qualify for new forms of funding therefore significantly limiting your options.
630 – 689
If you have a credit score in this range, then you have fair credit. You will have more options in this range than you did in the previous range but the options will still be limited and you will likely need to pay higher interest rates.
690 – 719
If you have a credit score in this range, then you have good credit! You will have plenty of choices when it comes to new credit and lower interest rates.
720 – 850
If you have a credit score in this range, then you have excellent credit! With a credit score as high as this, you will have access to the most options and a majority of the rewards offered by credit card companies. You will also likely get the lowest interest rates that can be offered.
How To Improve your Score
Hard work to improve your credit score is well worth it.
One of the easiest and quickest ways to improve your credit score is to simply make payments on time to improve the largest percentage factor of your payment history. This means pay your mortgage on time, make payments on your credit cards and car title loan(s) with consistency every month along with any other required monthly payments you might have.
Target your payment history along with the other four factors that make up your calculation and before you know it, you may be able to access some of those amazing perks and low rates that come along with an excellent credit score!
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