Credit scores have become a number that many people are obsessed with. You’ll see commercials for apps and software to help improve credit. If you’ve ever tried to buy a house, a car, or even get a credit card, the lender will check your score. Why is this three-digit number so important. There a several reasons to have as high a credit score as you can manage. This can aid you and make your life easier in several different areas.
Credit Score Defined
The most commonly used credit score model is FICO, founded in 1989. This score is based on your credit file with the three major credit bureaus, Experian, TransUnion, and Equifax. The score can range from 300-850, with the higher scores being the better. The factors that determine the score are:
- How Long Your Credit History Is – This accounts for 15% of the score and is based on how long you’ve had your oldest account and the average age of all accounts.
- Your Payment History – Making at least minimum payments consistently on time and paying off accounts will boost this factor. It makes up 35% of the score.
- Type of Credit – This accounts for 10% and is based on the types of credit accounts you have including mortgage, revolving credit lines, installment loans, and consumer finance.
- Debt to Credit Ratio – This factor makes up 30% of your score and is the ratio being the total amount of credit you have available to the amount of total debt you have. It is expressed as a percentage.
- Credit Checks – This accounts for 10% of the score. Each time you apply for any type of credit, the potential lender will do a credit check. Recent checks lower your score temporarily.
Range of Credit Scores
There are five ranges of credit score that are used to determine your creditworthiness. They are:
- Under 580 – Poor
- 580-670 – Fair
- 670-740 – Good
- 740-800 – Very Good
- 800-850 – Exceptional
Generally speaking, to be approved for most types of credit, you need to be in the good or higher range.
Advantages of a Good Credit Score
They are several advantages to having and maintaining a good credit score. They include:
- Lower Interest Rates on Credit Cards – The higher your score, the more a credit card company trusts you and thus will offer lower interest.
- Higher Limits – Increased trust also means lenders will be willing to offer you higher credit limits.
- Lower Car Insurance Premiums – There are insurance companies that will run a credit check to determine if they will approve your policy and how much they will charge you. A higher credit score can lower your rates. Other types of insurance also use credit scores.
- More Available Housing – Many apartments and homeowners who rent their properties check credit scores. The higher your score, the more of them will be available. If your score is high enough, you may qualify for a mortgage that will allow you to buy a condo or house.
- More Employment Opportunities – When you apply for a job, some potential employers will run a credit check to use as a reference of good character. A higher score can help you look like a better candidate.
Your credit score is a significant number in your life, right up there with your salary and age. Building good credit and a high score can benefit you in many ways. It’s a good idea to use a credit-monitoring service to keep track of your score.