A Very Short Explanation of Credit Scores
Ready for a speedy overview of credit scores? No fluff, just the basics about what a credit score is and how it affects your life.
What Is a Credit Score?
A credit score is a number between 300 and 850 that indicates how likely you are to repay your debts on time. Higher is better.
The two types of scores are FICO and VantageScore. Most lenders and landlords use FICO, so we’ll focus on that today.
What Makes Up a Credit Score?
Your credit score comprises factors related to your payment history and types of credit. Some factors matter more than others.
FICO credit scores break down as follows:
Payment History – 35%: Have you consistently made payments on time?
Credit Use – 30%: How much do you owe?
Length of Credit History – 15%: How long have you had credit? When was your newest account opened? What’s the average age of your accounts?
Credit Mix – 10%: What types of credit do you have (e.g., credit cards and loans)?
Inquiries and New Credit – 10%: Has your credit been run recently? Do you have new accounts?
That’s just an overview. Things are never truly that simple!
What are Good and Bad Credit Scores?
FICO breaks credit scores down into five categories:
Excellent – 800+: You have a long credit history, few to no new inquiries, owe little, and have paid your debts on time.
Very Good – 740 to 799: You have a lot in common with people with excellent credit. But, you may have a shorter credit history, a bit more debt, or another minor issue.
Good – 670 to 739: Things aren’t ideal – a few bigger hiccups or a very short credit history – but you’re doing all right.
Fair – 580 to 669: Your credit reports show many red flags.
Poor – 300 to 579: Your debt is high, and your payment history is spotty.
Why Does My Credit Score Matter?
Credit scores let lenders and landlords make informed decisions about your financial trustworthiness. A high credit score indicates that you’re likely to repay your debts as required by your contract. Lower credit scores may give them pause.
A low credit score can result in undesirable terms for mortgages, apartments, loans, and credit cards. Or, you may need a cosigner to have any chance of getting the money or housing you need.
Conclusion: Credit Scores Seem Simple, But…
Your credit score affects many parts of your financial life. It can impact whether you get an apartment, a car, or a credit card.
This has been a very brief overview of what they are. Definitely do some additional research if you want to learn more about credit scores!
But I’ll leave you with a few tips: You can maintain or boost your credit score by paying on time. Avoid taking on extra debt or getting new credit cards. And don’t close your oldest credit cards, even if you don’t use them!
