Whether you are aware of it or not, your credit score can have a huge impact on your life – this three-digit number determines whether you can get a loan to start your business, what mortgage interest rate you can qualify for and even whether you can rent an apartment you like. It’s incredibly important to know as much as you can about credit scores but most people don’t know even the simplest things about this metric of your financial health. Here are a few things every adult should know about credit scores:
Who determines my credit score?
You may already know that there are three major credit reporting agencies: Experian, Equifax and TransUnion. Each of these credit reporting agencies collects information about your debt, payment history, employment, arrest records, court proceedings involving you and more. Each agency then assigns you a credit score based on this information and forwards it to FICO, which then compiles scores from the three agencies and gives you one consolidated credit score.
What is considered to be a good credit score?
FICO credit scores can range from 300 to 850 with everything at or above 700 considered to be a good credit score. When looking at different credit score ranges in more detail, scores below 640 are considered to be poor, meaning that a person with this credit score is a high-risk borrower. Credit scores between 641 and 680 are considered to be fair, which means that you can get approved for a loan but your interest rate will be quite high. A credit score that’s higher than 680 but lower than 720 is good, which means that your interest rates will be quite low, while a score above 720 is excellent – you will get the best rates possible.
How is my credit score calculated?
A lot of people think that the exact credit score formula is a secret. In truth, we have pretty accurate information about what goes into your credit score. Your credit history is the main parameter that impacts your credit score – 35% of your FICO credit score is determined by it. This means that paying your bills and making your loan payments on time is the key to having a great credit score – even one late payment can send you back significantly and lower your credit score for years. The second parameter that factors into your credit score is the amount of money you owe, this determines 30% of your credit score. But it’s not just the amount of money you owe – its the amount of debt you have compared to the amount of credit that’s available to you. Ideally, you should use 30% or less of all the credit you have access to.
Other important factors that determine your credit score are the length of your credit history, which accounts for 15% of your credit score, the types of credit you have, which is 10% of your FICO score and new credit, which accounts for 10% of your credit score. With the last parameter, you should try to avoid opening several new credit cards or taking out multiple loans close in time if you don’t want your credit score to take a dive.