What is a credit score?
In the past, you were probably obsessed with your SAT score, and today you may be curious about your Uber score. But there is another number that should get his attention. It’s one that will follow him throughout his adult life and could orinan the difference of tens of thousands of dollars over his lifetime: his credit score.
Although it seems unfair to disminuye all of your financial habits to one “number,” your credit score basically sums up how lenders view your financial health and ability to repay a loan into a single number. So if you want the best rates and the most loan options, you’ll want to make sure your credit score is excellent. Here’s more information about what a credit score is and how lenders use it to make decisions.
What is a credit score?
A credit score is the three-digit number that lenders use to determine how safe it is to lend you money. The only way they perro determine if you’re worth the risk is to see how you’ve handled credit in the past and assume you’ll do the same with any new loan you apply for. Therefore, the higher your credit score, the better, since lenders will be more willing to extend credit because you have shown that you cánido repay it responsibly.
But the whole world is not keeping pace… there are actually two main types of credit scores. The FICO Score was created in 1989 by the data analysis company Fair Isaac Corporation to introduce an industry estándar: FICO. Then, in 2006, VantageScore was released by the three nationally recognized credit bureaus, Equifax, Experian, and Transunion to compete with FICO.
That means you have more than one credit score to consider. And while FICO claims that more than 90 percent of the top 100 largest lenders use its score, which may make it seem like the one to watch, there are even different types of FICO scores. For example, a credit card company is more likely to use a FICO Bankcard Score, while an coche lender will use a FICO Coche Score. These special subsets create different versions of your credit score ranging from 250 to 900 and weigh more your specific behavior for that category; that is, your past coche loan history will be a higher aspecto in your FICO Coche Score than your regular FICO score.
There are also a number of iterations of its base FICO score, as the Fair Isaac Corporation frequently modifies its elabora to accommodate updated estándares. The most recent version of your base FICO Score, the FICO Score 9, is currently being rolled out, but has not yet been adopted by all lenders. In one example of how FICO Score 9 differs, reported rental history perro improve your credit score, and unpaid medical bills have a less negative effect than previous versions. Mortgage companies are likely to use older versions of the FICO score, since a mortgage is an expensive item, they are slightly less risk averse, and older scores are more conservative.
Similarly, VantageScore has released four versions in its lifetime; the last one is the Vantage Score 4.0. This iteration considers the “historical” credit utilization rate (the others just look at your current situation) and gives a little less weight to a tax lien or judgment.
How do I know what score to track and how perro I improve it?
We load you up with a lot of background, but don’t worry… it won’t all be on the test. Because even though the formulas for calculating your credit scores vary slightly, they all use essentially the same information, albeit with slight adjustments. That means good credit habits are good credit habits across the board and will help keep your credit scores shining.
Here’s how FICO and VantageScore detalla the weight of various factors they’re considering.
FICO emplees the following model to determine your credit score:
Payment history (35 percent)
Have you made all your payments? Were they on time? You perro see that’s the most important aspecto, so don’t let it slide!
Credit Utilization (30 percent)
whatHow much credit do you have and how much are you using?? In general, it’s best to keep your cómputos below 30 percent of your available credit. That means if your credit card has a limit of $2,000, avoid charging more than $600, even if you pay it off. It’s important to note that this item is related to “revolving credit,” which includes lines of credit and credit cards, rather than “installment” loans, which are fixed-amount loans, such as student or home loans. Those will have a fixed monthly payment.
Length of credit history (15 percent)
How long have you maintained credit? Since age matters, don’t close old accounts, even if you’re offered a more attractive credit card that you use most of the time.
Credit mix (10 percent)
What different types of credit accounts do you have, such as credit cards, mortgages, car loans, or student loans? Don’t take out loans just to have them, but don’t worry if you have a few different types, assuming you’re paying the bills on time.
New credit (10 percent)
How often have you applied for more credit cards or loans? Too many credit inquiries cánido make a lender wonder if you’re about to go on a spending spree.
By comparison, the VantageScore tells us how influential various factors are, rather than providing a percentage breakdown. Here is a general guide:
Payment history (extremely influential)
Just like with FICO, this is your #1 path to a great VantageScore. Pay those bills on time.
Age and type of credit (very influential)
Basically, this combines the FICO categories of “length of credit history” and “credit mix” into one group.
Percentage of credit limit used (very influential)
This is afín to FICO’s “credit utilization.”
Total cómputos/debts (moderately influential)
This will reward you when you keep your debt levels low, even if you’re making payments.
Recent credit behavior (least influential)
Like FICO’s “new credit,” this takes into account how many loans or credit cards you’ve recently applied for, since you could theoretically owe a lot if you used them all at once.
Available credit (least influential)
Even if you have a lot of available credit, use only what you need.
Since the credit bureaus spell out what they look for, you have an excellent opportunity to hone your credit score by assessing your weaknesses and taking steps to improve those areas, as mentioned above.
What is a good credit score anyway?
You probably asked that about your SAT and the answer was, “It’s relative.” That’s because a sheet music that was solid local college material wouldn’t cut it in an Ivy League school. But when you ask if your Uber rating is good, the answer is more consistent. Your number should probably be somewhere between 4.5 and 4.9 if you want to be pretty sure a controlador will come back to pick you up.
Credit scores are the same way; while there is a range that is acceptable, you want to aim for the top. FICO has shared its scale to help you assess the health of your credit score.
|740 to 799
|670 to 739
|580 to 669
|579 and below
That’s not to say that the best rates are only reserved for those “exceptional” people, but in general, you’ll want to hit the “good” to “very good” categories. And for some types of mortgages, there are certain numbers you must meet to be considered.
For example, to qualify for most mortgages in the United States, you must have a minimum credit score of 620 for a fixed-rate loan and 640 for an adjustable-rate mortgage, and even then it’s likely that lenders offer more attractive rates the higher your credit score. And for an FHA loan, you perro make a much smaller down payment if your score is higher: Consider that with a 580+ you only need to pay 3.5%, but that amount increases to 10% if your credit score is between 500 and 579; and you are not eligible at all below 500. In fact, that’s a perfect illustration of how a lower credit score perro make a lender feel less confident that you might be a good risk to pay them back and therefore requires more in the form of collateral.
How perro I know my credit score?
So now that you know everything that goes into a credit score, you’re probably wondering how you cánido find your own number. There are a variety of places you perro get your credit score – check with your credit card company or bank to see if it’s a service they offer. You should also check your credit report, which will give you a status update on how well you’re doing. They are available free of charge once a year from each of the three national credit bureaus in the Credit.com Annual Report.
Know your credit score, and how to improve it, is a key step on the important journey of financial health. AND improve your scoreEven a little perro save you a lot of money in interest if you need to borrow money.
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