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 theyâ€™re important.
Hereâ€™s everything you need to know about credit scores.
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.
Several companies offer consumer credit score information:
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 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 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.
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.
The factors considered in your your credit score include:
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.