What Is A Credit Score?
A credit score is a calculation based on information from a credit report which gives a representation of how credit-worthy a person is or how likely a person is to default on their loan.
The most common credit score is the FICO score which calculates based on reports from the agencies Experian, Equifax, and TransUnion.
Why Your Credit Score Is Important
When you apply for a loan, be it for a car, house, or credit card, the lender will look at your credit score to measure what kind of interest rate to charge you.
The higher your score the lower your rate. The lower your score the higher your rate.
It’s in your best interest to have a better score as the interest rate charged is basically how much you will be paying to borrow money. A high score means you are more likely to pay back the loan without problems. A low score means there’s considerable risk in giving you a loan so a lender will charge you more for a loan in case you don’t pay it back. (See my article Buying A Car – Know Your Credit Score And Get Financing Before Hand for an example of how knowing your credit score can help you save money).
Credit scores are becoming more and more important. They are being used in job interviews (to see if the applicant is responsible with his credit), for insurance rates, and even to get cell phone contracts.
How Is Your Credit Score Determined?
The score is calculated approximately by:
- 35% Payment History – How well you have paid and if they have been on time
- 30% Credit Owed – The amount you owe relative to the amount of credit you have available
- 15% Length of Credit History – How old your oldest account is and the average age of your credit
- 10% New Credit – Amount of credit opened recently as well as recent credit inquiries
- 10% Type of Credit in Use – The mix of credit cards, retail accounts, finance loans, and mortgage loans.
For more details check out: Factors of a Credit Score
What Do The Credit Score Ranges Represent?
The FICO score ranges from 300 to 850. It’s graded as such:
- 760 and above A Best credit (lowest rates) available
- 700-759 B
- 600-700 C
- 599 and below D or F Worst credit (highest rates) available.
How To Make Your Credit Score Better
Here are a few tips to improve your score:
- Pay your bills on time and make it an ongoing habit.
- Pay off your debt. Don’t just move it around.
- Request credit reports from the three main agencies and check for any errors that may show. They are not all identical and one could have an error.
- Avoid opening a number of new accounts in a short period of time.
When Do You Need Your Credit Score?
If you are planning on getting financing for a car or a home you should request the three credit reports and your credit score. Car insurance companies also use your credit score to help determine how much to charge you.
Credit reports only list information about your accounts while the credit score is the interpretation of your accounts. You should have both.
Your credit score is an important financial number that, if kept high, can potentially save you thousands of dollars over time.
{ 5 comments… read them below or add one }
So it doesn’t matter how much you earn? I guess this limit the amount of credit you can get?
@Credit Rating – What you earn isn’t factored into your credit score. The score is determined through the five factors above. Now, a lender would look at what you earn as well as your score to figure out how much they can lend and at what rate. So what you earn can be a factor from the lender’s point of view but not in the actual score.
A six-figure salary doesn’t give you a better score.
Don’t charge more than you can pay off in a month. You don’t have to pay interest on a credit card to get a good credit score, and it’s a smart financial habit to pay off your credit cards in full each month.
my credit score is 680 to 714 is this a good credit score to get a car
It’s probably good to get a car but the question is really what kind of rate you will get. If you are looking for the lowest rates it’s most likely not high enough. Still, that doesn’t mean you can’t get a car.