Credit Scores Explained

What Is a Credit Score?

A credit score is a number given to a consumer that depicts their creditworthiness. This score will fall on the scale of 300-850. Credit scores are determined by total levels of debt, open accounts, repayment history, and other factors. Payment history accounts for 35% of the calculation and the total amount owed makes up another 30%. Length of credit history accounts for 15%. The type of credit used and the amount of new credit each make up 10% of the calculation.  A higher score means that the consumer is a better borrower and is more likely to be approved. The model used to create these scores was created by the Fair Isaac Corporation or FICO. The most commonly used credit scores used by financial institutions are known as FICO scores.

When Is a Credit Score Used?

Credit scores are used by financial institutions and lenders to determine which consumers they want to extend credit or a loan to. To get a credit card, mortgage, apartment, loan, or any other necessary items, a credit score will be necessary for a consumer. Financial institutions and lenders will run a credit check on a potential borrower or client to see how likely they are to be repaid. They are trying to ensure that they will not lose the money they lend out to a consumer and that they will be repaid on time.

What Is a Good Credit Score?

As previously mentioned, credit scores fall on a scale from 300-850. While each financial institution and lender has its thresholds for good and bad credit scores, most people agree on similar numbers. Usually, a credit score below 640 is considered a subprime borrower. Subprime borrowers may have higher interest rates, shorter repayment terms, or a required co-signer. A credit score of 700 or higher is considered a good credit score. The interest rates will be lower and a credit will be easier to receive for these lenders. Consumers with a credit score above 800 are considered to be excellent. These people will have the most options for credit and the lowest interest rates.

How Can a Credit Score be Improved?

Having a poor credit score can be detrimental to a person’s life and well-being. There are some steps a person can take to improve their credit score. One easy way to do this is to ensure that they are making all payments on time. This tip will take around 6 months to have an effect. Another tip is to not close any credit accounts. Closing a credit account can negatively affect a credit score by increasing the credit utilization rate. Instead of closing an account, it is better to just stop using it and allow it to be open.

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