Whether good or bad, your credit score plays a crucial part in your day-to-day life. However, most have no idea what their credit score means, how agencies calculate the number, or how to improve it! If that describes you, continue reading to find out everything you need to know about that important three-digit number…
What Is A Credit Score
Whether you like it or not, credit scores determine quite a lot in life. At its core, it shows one’s credibility and how likely they are to pay back a loan, credit card debt, and the like. More precisely: “a credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual,” states Wikipedia.
Everyone from banks and insurance firms to landlords and employers use a credit score to understand how responsible someone is. It tells them beforehand if they can trust that person with money, an apartment, or the responsibilities of a job. But it doesn’t stop there! Lenders also determine one’s interest rate after looking at an individual’s credit score. But how does one’s score get created?
The FICO Scale
By far, the most popular credit score scale comes from FICO, a well-established finical company. The FICO score has a range from 300 to 850. However, while 300 is the bottom, it’s far from the minimum for most procedures. Usually, banks and landlords will not lend or lease to anyone with a score below 600. Still, only 30% of people get to carry an excellent rating of 750-850, and just over 13% have a good score of 700-749. Meanwhile, 18% have 650-699, 34% have 550-649, and 16% have 350-549, a bad rating.
As stated, your score has a significant impact on interest rates, and a little change to the score and mean a massive change to rates. For example, someone with a score of 659 would receive around a 5.3% rate on a 30-year mortgage. Yet, banks would offer a person with a 680 score an interest rate of around 4.7%. While that might not seem like a lot, this “little” difference would cost a person a whopping $28,000 over the entirety of the mortgage.
How To Calculate On Your Own
How can you calculate a credit score, though? While we always recommend using a professional service, like CreditKarma, you can figure it on your own. Roughly, your credit score is based on:
- Payment History: Be it paying your rent, electricity, internet, or credit card bills, always pay on time!
- Utilization Ratio: Credit scores also take into account how much you use your credit, called a utilization ratio. Basically, if you don’t use a lot and have a bunch of money left, they believe you won’t miss payments!
- Age of Accounts: This is the length of account history and how frequently they are used.
- Number of Accounts: Don’t open a lot of accounts in a small amount of time.
- Types of Accounts: Managing different types of accounts well adds a massive bonus to the credit score.
Make sure that your credit score is high enough before opening new accounts or renting a place. Having troubles? Don’t forget to contact a financial advisor.
Sources: Finance101, Money, Wikipedia.