Everything You Need to Know About Credit Score
According to Fortunly, one in five Americans aged 20-29 doesn’t know their credit scores. And, if you don’t really understand what a credit score is or how it can benefit you financially, why would you need to know your credit score, right?
Not exactly! A credit score is an important aspect of living life in America. Some employers will check your credit score in order to qualify for a job, it’s a crucial component of getting a mortgage loan, and it can affect your ability to get lower interest rates on certain credit cards.
From learning about what a credit score even is to figuring out how to improve your credit score, we’ve created a comprehensive guide on everything you need to know about credit score.
What is a Credit Score?
The actual definition of a credit score is a number ranging from 300-850 that depicts a consumer's creditworthiness. Basically, depending on various factors such as previous debt and other financial activity, a credit score is a way to determine whether or not you’re eligible to take out other lines of credit. This is why it’s such an important aspect when it comes to credit cards, car loans, and mortgage loans.
When determining your credit score, scoring systems will look at the number of open accounts you have, your total levels of debt, and repayment history. This includes everything from student loans to credit cards and any other form of loan you’ve taken out in the past. There are a few credit-scoring systems that exist, but the FICO score is usually the most commonly used when determining your creditworthiness.
How do FICO and VantageScore calculate a credit score? As mentioned, they’ll look at various factors such as the total amount of debt, repayment history, new lines of credit, length of credit history, and the types of credit you’ve taken out (this is why some financial experts suggest having a credit card). But, Experian, Equifax, and Transunion are the three major credit reporting unions that report and update credit histories.
What Are the Different Credit Score Ranges?
After determining your creditworthiness based on your credit score range, most companies and lenders will either approve or deny your application for a loan or a credit card. If they approve the loan then, depending on your credit score range, they’ll set interest rates and other terms. This means that it’s not only best to have a good credit score but work towards one that’s excellent.
Generally, you’ll find that lenders group credit scores into five different categories:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
It’s generally hard to get approved for a loan or access good interest rates if your credit score is lower than 640 to 670. Once you reach 700, you’ll notice that a lot more doors open for you financially. And, having a credit score of 800 or higher will ensure that you’re able to enjoy some of the best loan terms available.
What Are the Different Credit Scores?
You might hear the term “FICO score” and think that it’s different from your regular credit score, but it’s not. A FICO score is a type of credit score. So, let’s break that down.
There are three credit reporting bureaus: Experian, Equifax, and TransUnion. They collect your credit information. Then, they use that information along with a credit scoring model to generate your credit score. Those two scoring models are VantageScore and FICO Score.
This is why your credit score can look different from company to company. Each credit reporting bureau scores slightly differently and they’re often off by a point or two.
What Is a Good VantageScore?
If you’ve got an American Express, Capital One, or Chase credit card (among a few others), then the score they’ll report to you is a VantageScore. In most cases, you’re able to access your score for free through the client portal of their website.
But, what good does looking at your score do if you don’t know what a good score even is? Both VantageScore 3.0 and 4.0 use a scale between 300-850, which is the same as a FICO Score. However, what’s defined as “poor,” and “good” can vary slightly.
VantageScore defines 661 to 780 as its good range. According to recent statistics, about 38% of people fall into the “good” category. Here is the full breakdown:
Excellent: 781 to 850
Good: 661 to 780
Fair: 601 to 660
Poor: 500 to 600
Very Poor: 300 to 499
What Affects Your Credit Scores?
The easy thing about credit scores is that it’s pretty clear what affects them, making it easy to make adjustments to your financial and spending habits in order to improve your score. The following are factors that affect your credit score the most:
- Late payments
- The amount you owe in debt
- Length of credit history
- Credit mix
- Hard pulls
When looking at your FICO Score, it’s a bit easier to understand how each factor weighs on the overall score because the FICO scoring model uses percentages to weigh each factor. Late payments, for example, account for 35% of your overall score. VantageScore doesn’t use percentages but notes that they are very similar to the FICO model.
How to Check Your Credit Score
If you want to check your own credit score, we’d advise doing so via a third-party app such as Mint and Credit Karma. You’re technically able to request a free copy of your credit report from each of three major credit reporting agencies once each year, but apps and platforms such as Mint will allow you to see an updated credit score more often without any penalties.
Penalties? Yep. Credit inquiries are classified as a hard inquiry or a soft inquiry. If you’re applying for a new credit card or a loan, the financial institution will perform a hard inquiry which requires your social security number. Each hard inquiry results in a small dip in your credit score and the inquiry will remain on your credit report for up to two years.
Soft inquiries, however, don’t appear on your credit report. A soft credit inquiry is a way to obtain a credit report just for personal use. And, credit aggregating services and financial planning apps are able to perform soft inquiries to help inform you of future financial decisions and monitor how you’re either improving or hurting your credit score.
Why Having a Good Credit Score Is Important
Having a good credit score isn’t just about having a high number. Your credit score can help you unlock access to lots of financial products that can help you grow your long-term wealth. Namely, having a good credit score allows you to access loans at better rates. Whereas a friend with a 650 credit score might have to pay a 15% interest rate on a 30-year mortgage loan, if your credit score is excellent, you’ll snag a lower interest rate and save thousands of dollars over the lifetime of the loan.
This is something that most people often miss about credit. It’s the basis of your financial foundation and can help you take out good debt in a way that helps you grow lifelong wealth.
Ways to Improve Your Credit Score
There are a few simple ways to improve your credit score without opening more lines of credit. One of the easiest ways is to ensure that you’re paying all of your bills on time. This means paying your credit card bills and student loan payments on time each month. In doing so, you’ll usually see an improvement in your credit score after about six months.
If you don’t currently have any credit, you’ll want to do your research and perhaps open a new line of credit with a credit card company. Companies have credit cards for students and other types of cards available to suit the specific financial needs of various types of spenders. If you already have a credit card and are in good standing, contact the company to ask if you can increase your line of credit.
And, if you do already have a credit card but don’t use it much, don’t simply close out the card. Closing out accounts can affect your credit utilization rate and reduce your score in terms of the total credit amount you have open. If you’re really interested in closing out the account, it’s best to speak with a financial advisor in order to look at your options and assess how it will affect your credit score and what some other options might be.
Optimize Your Credit Score with Cheese
If you're looking for a way to start building your credit or improve your credit score, getting a credit builder loan can be a great way. Cheese Credit Builder is a great tool to build your credit score and save money at the same time. Simply apply for a credit builder loan of as little as $500 and choose a term length of 12 or 24 months. Use our autosave feature to make on-time payments and build a great credit history little by little. Cheese reports all your on-time payments to 3 credit bureaus.
Sign up here to get started today!