A credit score is an important number that lenders use to determine if you’re a good risk for them to lend money. Generally, the most important factor is payment history. Keep balances low and pay bills on time to boost your score.
Amounts owed, credit mix and new credit also are considered. But, the biggest impact is how well you manage your credit.
What is a credit score?
A credit score is a three-digit number that helps lenders assess your creditworthiness. It’s based on information in your credit report, which lenders obtain when you apply for a loan or a credit card. It’s also used to determine the terms of credit you’re offered, including the interest rate.
The components of your credit score are payment history, amounts owed (including how close you are to maxing out your credit cards), the length of your credit history and the types of accounts you have (revolving versus installment credit). Generally speaking, the longer you have credit in good standing, the better your credit scores will be.
Credit scores are based on information in your credit report, typically sourced from the three nationwide credit bureaus: Experian, Equifax and TransUnion. The most common scoring system is FICO, which is used by 90% of top lenders.
How is a credit score calculated?
A credit score is a number (often between 300 and 850) that lenders use to help determine your creditworthiness. It’s generated by a mathematical algorithm that analyzes information in your credit report and assigns a score.
Five factors generally go into a credit score: payment history, amounts owed, credit utilization, length of credit history and new credit. The specific weighting of each factor varies depending on the credit scoring model used.
The most important factor in a credit score is on-time payments, which usually accounts for 35% of your total score. Next, credit scoring models consider your credit utilization ratio, which looks at the amount you owe on consumer debt, such as balances on credit cards and lines of credit versus their respective credit limits. It’s typically recommended to keep this ratio under 10%. A lender also looks at the average age of your credit accounts, which can account for 15% of your score. This helps lenders gauge your credit stability and the types of accounts you have (like installment loans like auto or mortgage loans, retail or student loans). The last element is the depth of credit, which takes into account how long you’ve had each type of account open.
What is a good credit score?
Having a good credit score can mean the difference between being approved for loans and getting better rates on those loans. It can also make renting an apartment or purchasing a home easier, and it can help you save money on auto and homeowner’s insurance (depending on the state).
A good credit score ranges from 300 to 850 for FICO scores and from 721 to 780 for VantageScore credit scores. The average credit score for consumers is about 660.
A good credit score generally means paying your bills on time and keeping your balances low compared to the total amount of available credit. It also considers the type of credit you have – for example, a person with both installment accounts (like a car loan or personal loan) and revolving accounts (like credit cards) is often judged more favorably than someone who only has revolving debt. Credit scoring models also look at how recently you’ve applied for credit – this is called recent activity.
What is a bad credit score?
CNBC Select reports that lenders use credit scores to help determine whether they will lend you money or approve your application for a loan or credit card. A bad credit score can make it harder for you to qualify for those financial products and could also come with a higher interest rate.
The specific factors that impact your credit score vary by scoring model and financial product. However, some of the most common include payment history (35%), credit utilization (which is your debt balance compared to your credit limit) (25%), how long you’ve had credit (15%) and your credit mix (10%).
Negative factors that can hurt your credit score include missing payments, late payments and defaulting on accounts. It’s also generally a bad idea to apply for too many credit cards or loans in a short amount of time. And using money-transfer apps to pay bills instead of a bank account may be a negative factor for some scoring models.