Your credit score is a number based on several different factors that gives lenders an indicator of whether or not you are likely to pay your debts. Any time you apply for a car loan, mortgage, credit card, or other form of credit, the lender will first check your credit score.
The higher your credit score, the more likely you are to receive good terms on a loan, including lower interest rates and lower payments. This is because creditors assume you are less of a risk to lend to if you have a better credit score.
How are Credit Scores Calculated?
There are multiple ways credit bureaus calculate credit scores, which is why you may have noticed your score is different depending on which credit bureau you check. Equifax, Experian and TransUnion are the three credit bureaus lenders reference.
Credit scores fall between 300 and 850. The higher the number, the better the score. They are generally ranked as follows:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
Credit scores can be calculated using the following:
- Payment history (35%) – Whether or not you’ve paid past credit accounts on time which helps determine the amount of risk a lender might take on when extending credit.
- Amounts owed (30%) – If you are already using a lot of your available credit, this may indicate to lenders that you are at higher risk of defaulting.
- Length of credit history (15%) – Generally, a longer credit history will increase your credit score, but this is not always the case. Lenders might look at how long your credit accounts have been established and how long it has been since you used certain accounts.
- New credit (10%) – Your score might be determined by your mix of credit cards, installment loans, retail accounts, finance company accounts, and more.
- Credit mix (10%) – For people that don’t have a long credit history, opening several credit accounts in a short amount of time might indicate to lenders a greater risk.
Information from: www.myfico.com/
Factors credit scores DO NOT take into account:
- Your race
- Your gender
- Your religion
- Your marital status
- Your national origin
Bottom line: Paying your bills on time and being thoughtful about what lines of credit you use can help you increase your credit score. In fact, Installment Loans can be very useful in increasing your credit score. Also, check your credit report frequently to make sure it is accurate, and that nothing unexpected comes up. Your credit score is a good indicator of what types of loans you’ll be able to qualify for, and paying attention is a great first step in identifying how you can take control of your financial health.