Credit Score

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Your credit score is an evaluation that predicts your risk of defaulting on a loan.

What is a credit score?

Sometimes referred to as a FICO score, it is a three-digit number that assesses your creditworthiness. A mathematical algorithm uses information from your credit report to deliver a score from 300 to 850. As a result, your score is based on your previous actions and is a depiction of your reputation as a borrower. The higher the score, the more trustworthy the borrower is to repay his debts.

What impacts a credit score?

Payment History

Your account payment history, such as how you pay your credit card bills, heavily influences your credit score. If you have any missed payments or delinquencies, your score will drop.

Credit Utilization Ratio

Your credit utilization ratio is how much debt you have on your credit cards divided by the credit card’s limit. The lower your outstanding balances across your cards, the lower your CUR, and the higher your score.

Length of Credit History

The longer you have held your accounts, the better your score.

Types of Credit

What kind of accounts you have has a small impact on your score. For example, credit cards are revolving credit whereas a personal loan is an installment credit.

New Credit

How recently you have applied for new credit accounts or authorized inquiries has a small impact on your score.

What is considered a good credit score?

Credit scores range from 300 to 850. An excellent score ranges from 750 points to the perfect score of 850. Consequently, a good credit is from 700 to 749. Next, a fair credit is from 650 to 699. As we go down the line, a poor score is 550 to 649 points. Finally, a bad credit score is 550 and below.

Credit Score Versus Credit Report

Your credit score is a three-digit number, which is derived from your credit report. Your report is a detailed history of your credit history, including delinquent payments, bankruptcies, number of credit accounts, as well as your outstanding balances.

Why are credit scores important?

Lending

First, they play a vital role in lending decisions. The most common example is when you want to borrow money. Potential lenders use your credit score to evaluate if you qualify for a loan and what interest rate to give you. If you are a trustworthy borrower, you are more likely to secure a lower interest rate than a high-risk borrower.

Additionally, it is used to determine your eligibility for a new credit card and lines of credit.

Insurance

When applying for insurance, such as car insurance or even homeowners insurance, your credit will impact your premium. Insurers like to see high credit scores because it indicates you are fiscally responsible. In 2007, the Federal Trade Commission released a report that indicated that people with higher scores are less likely to file a claim. As a result, with a higher score, you’re considered less of a risk for an insurance company and may receive a lower premium.

Employment

Some companies may also want to check your credit. Some employers believe that your score is a good predictor of your judgment and how you handle responsibility.