Everything You Need To Know About Credit Scores


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More and more these days, television ads and news stories are talking about credit scores. That may have you wondering what they are and why they’re important.

Here’s everything you need to know about credit scores.

The basics

One of the simplest, easiest-to-understand definitions of a credit score is that it's a number assigned to you that shows lenders how likely you are to repay loans.

Credit scores are pretty simple to understand. Basically, a lower number reflects a worse credit score (or rating). This means the person is a bad credit risk and is less likely to repay a loan to a creditor. A higher number means the person has a better credit score. This makes them a good credit risk because they're in a solid position to pay back a loan.

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Credit reporting companies

Several companies offer consumer credit score information:

FICO

The oldest of all credit reporting companies is FICO. It was founded in 1956, when credit cards were just becoming popular. Its FICO score is perhaps the best-known credit scoring measure.

FICO offers a "classic" credit score that ranges from 300 on the low end to 850 on the high side. To understand how the population rates, more than a third of it has a very good credit score in the 750-850 range. The median credit score usually falls around 710 to 720.

Not only does FICO offer a classic credit score, it also provides scores related to bank card and auto credit worthiness. These show auto and credit card companies the likelihood of a borrower to repay a credit card or auto loan. The scale for these ratings range from a low of 250 up to 900. In addition, they have a FICO mortgage score that measures likelihood to pay back a mortgage. The scale for this ranges from a low of 300 to a high of 850.

Experian

Experian has not one, but two different credit scores. One is called Plus Score and is used for consumer education purposes. It ranges from a low of 330 to a high of 830. They also offer Experian Scorex PLUS which ranges from 300 to 900.

TransUnion

TransUnion is another credit monitoring service. The TransRisk New Account Score ranges between 300 and 850, and Experian National Equivalency Score ranges from 360 to 840.

Equifax

This company offers the Equifax Credit Score. The scale for this score is between 280 and 850.

There are additional smaller credit reporting services that we won't get into here. The important thing to take away from all this is that no matter the service you use, a good credit score usually falls in the 700 to 800 range or higher and poor ones are around 300 to 550.

Your credit score

The factors considered in your your credit score include:

  • Payment History. Credit bureaus monitor whether you pay things like your credit cards, student loans and utility bills on time. You can gain the upper hand by simply paying your bills on or before the due date.
  • Amounts owed. Credit monitoring services look at how your credit balances compare to your credit limits. If you want to improve your credit score, don't max out your limits.
  • Years of credit. Credit bureaus check the age on your accounts. The longer your credit history, the better lenders can determine your ability to repay. Maintaining good credit over time is a plus.
  • New credit. Credit agencies watch how many accounts you've opened recently, along with the number of lenders that have checked your credit. Too much activity could be a sign that you're about to go on a spending binge. Avoid problems by not applying for too much new credit all at once.
  • Types of credit. Finally, credit services watch the mix of credit accounts you hold, such as auto loans, credit cards, student loans or mortgages. A good mix of credit types is viewed as healthier than having too much of a single type of debt. Take steps to avoid having only credit card or student loan debt.

The key take away is that you must be diligent and monitor your credit score. If you find that it's dropping year-over-year, you should figure out what's going on. Are you making poor credit decisions or are their errors are your report that need to be fixed?

You have the power to gain control over your credit. What are you waiting for? Start taking charge today.

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