What is a credit score? Your credit score can impact everything from loan interest rates to credit cards and more. In this video, Equifax will tell you all about the credit score ranges, how credit scores are calculated and why credit scores are important. [Duration - 2:24]
Highlights:
- A credit score is a three-digit number designed to represent the likelihood you will pay your bills on time.
- There are many different types of credit scores and scoring models.
- Higher credit scores generally result in more favorable credit terms.
A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. Creditors and lenders consider your credit scores as one factor when deciding whether to approve you for a new account. Your credit scores may also impact the interest rate and other terms on any loan or other credit account for which you qualify.
What is considered a good credit score?
Credit score ranges and what they mean will vary based on the scoring model used to calculate them, but they are generally similar to the following:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
There’s no “magic number” that guarantees you’ll be approved for a new credit account or receive a particular interest rate from a lender. However, higher scores typically suggest that you have demonstrated responsible credit behavior in the past, which may make potential lenders and creditors more confident when evaluating a new request for credit.
Why do I have different credit scores?
It’s a common misconception that you have only one credit score. In reality, there are many different credit scores and credit scoring models.
Your credit scores may vary depending on the consumer reporting agency (CRA) providing the score, the credit report on which the score is based and the scoring model.
Credit scores provided by the three nationwide CRAs — Equifax®, TransUnion® and Experian® — may also vary because your lenders may report information differently to each. Some may report information to only two, one or none at all.
It’s also possible for your credit scores to vary by industry. If you’re in the market for a new car, for example, an auto lender might use a credit score that places emphasis on your history of paying auto loans. A mortgage lender, on the other hand, might use a formula to determine your risk as a mortgage borrower.
All of these factors can lead to differences in your credit scores.
How are credit scores calculated?
Your credit scores are calculated based on the information included in your credit reports. Like your credit score, you have more than one credit report.
Your credit scores may vary depending on the scoring model used to calculate them as well as the information on the respective credit report. However, most credit scoring models consider the same factors:
- Your payment history. This is typically the most significant factor used in calculating your credit score. Your payment history includes information on any open credit accounts in your name. It also provides data on missed or late payments, bankruptcy filings and debt collection.
- The amount of credit used vs. your total available credit. This calculation — also known as your credit utilization rate or your debt-to-credit ratio — is another important factor to lenders. Expressed as a percentage, your credit utilization rate generally represents the amount of revolving credit you’re using divided by the total revolving credit available to you. (Revolving credit accounts are things like credit cards, while mortgages and other fixed loans are considered installment accounts.) Lenders and creditors generally like to see a credit utilization rate of 30% or lower.
- The types of credit accounts in your name. Some formulas may also consider the types of credit accounts you have. It’s usually a good idea to keep a mix of both revolving and installment accounts. This helps show lenders and creditors you’re comfortable managing many different types of credit.
- The length of your credit history. The overall length of your credit history can also impact your score. Formulas may consider the age of both your oldest and your newest accounts.
- The number of recent requests for credit you’ve made. Applying for a new line of credit triggers what’s known as a “hard inquiry” on your credit report. Numerous hard inquiries within a short period of time can negatively impact your credit score as it may suggest to lenders that you’re taking on more debt than you can reasonably expect to pay back. It’s a good idea to only apply for new credit when you need it. Credit score calculations generally don’t consider “soft inquiries,” which are requests to check your credit report that are not tied to an actual credit application (for example, when you receive a pre-qualified credit card offer). Checking your own credit score also will not impact your credit score or credit history.
Why are credit scores important?
Why is it important to strive for a higher credit score? Simply put, borrowers with higher credit scores generally receive more favorable credit terms, which may translate into lower payments and less interest paid over the life of the account.
Remember, though, that everyone’s financial situation is unique. Individual lenders may also have their own criteria when it comes to granting credit, which may include information such as your income.
The types of credit scores used by lenders and creditors may vary based on their industry. For example, if you’re buying a car, an auto lender might use a credit score that places more emphasis on your payment history when it comes to auto loans.
Credit scores may also vary according to the scoring model used and which CRA furnishes the credit report. That's because not all creditors report to all three nationwide CRAs. Some may report to only two, one or none at all. In addition, lenders may use a blended credit score from the three nationwide CRAs.
FAQs
A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. Creditors and lenders consider your credit scores as one factor when deciding whether to approve you for a new account.
What is a credit score and why is it important? ›
A credit score is usually a three-digit number that lenders use to help them decide whether you get a mortgage, a credit card or some other line of credit, and the interest rate you are charged for this credit. The score is a picture of you as a credit risk to the lender at the time of your application.
Why is a credit score important quizlet? ›
A credit score is a number that represents your credit-worthiness, or the risk a financial institution will take in loaning you money. Credit is important because it can determine whether you can purchase items. Credit is important because it can determine how much you will be charged to borrow money.
How important is credit really? ›
Your credit can influence whether or not you are able to rent the apartment you want, how much you pay for insurance, the credit limit on your credit cards, the interest rate you pay when you take out a car loan or mortgage, and many other things.
Why does everyone need a credit score? ›
Here are just a few: Interest rates: If you ever want or need to borrow money (for a mortgage or auto loan, for instance), you'll likely get better interest rates with a higher score. Additionally, you'll likely find it easier in general to be approved for financing if you have a well-established credit score.
What is credit and its importance? ›
Credit can be a powerful tool in achieving important financial goals. It allows you to make large purchases (such as a home or a dental practice) that you otherwise would not be able to afford if you were paying in cash.
Which credit score is most important? ›
FICO scores are generally known to be the most widely used by lenders. But the credit-scoring model used may vary by lender. While FICO Score 8 is the most common, mortgage lenders might use FICO Score 2, 4 or 5.
Why is it important to view your credit score? ›
Lenders, businesses, and other entities may look at your credit report and credit score to help decide how financially trustworthy you are. Thus, establishing good credit can help you get approved for loans or a credit cards, earn lower interest rates, get approved for higher lines of credit, and more.
What is the purpose of a credit report? ›
A credit report is a detailed record of how you've managed your credit over time. Credit reports are used most often by lenders to determine whether to provide you with credit and how much you will pay for it. Credit reports are also used by insurance companies, employers, and landlords.
Which is the most important factor of your credit score why is it so important and what can you do to keep this part from being low? ›
The most important factor of your FICO® Score☉ , used by 90% of top lenders, is your payment history, or how you've managed your credit accounts. Close behind is the amounts owed—and more specifically how much of your available credit you're using—on your credit accounts. The three other factors carry less weight.
A credit score indicates an individual's credit health. This indicates whether the individual can undertake a certain loan, as well as their ability to repay it, helping to gauge the level of risk attributed to an individual when it comes to repaying a loan.
How can your credit score affect your life? ›
Low credit scores can make getting a mortgage, car loan or credit card harder to get. Here are a few more ways that you might have thought of that your credit score will impact. Utilities: Utility contracts like those for your gas, electricity and water are all essentially a form of credit.
Why is it important to use your credit? ›
Having access to credit allows you the flexibility to get something now and pay for it later. Credit can help you do things like buy a house or a car, or finance your education, but it's also a major responsibility that's important to understand before you start to take on debt.
What is a credit score and why does it matter? ›
A credit score measures how likely an individual is to repay debt as agreed. In simple terms, credit scores reflect how financially trustworthy a borrower is: a higher score signals that a consumer is less risky. Credit scores range from 300 (poor credit) to a maximum of 850 (exceptional credit).
Do you really need credit in life? ›
You can avoid debt without committing to a life without credit. By sticking to a spending plan and making intentional use of credit products, you can take steps to build a credit history and enjoy the benefits of credit cards without going into debt.
What are the benefits of having a good credit score? ›
Here's a look at how good credit can benefit you.
- Borrow money at a better interest rate. ...
- Qualify for the best credit card deals. ...
- Get favorable terms on a new cell phone. ...
- Improve your chances of renting a home. ...
- Receive better car and home insurance rates. ...
- Skip utility deposits. ...
- Get a job.
Credit is the ability of the consumer to acquire goods or services prior to payment with the faith that the payment will be made in the future. In most cases, there is a charge for borrowing, and these come in the form of fees and/or interest.
Why do you need to build your credit score? ›
If you don't have good credit, you may miss out on securing a low-interest rate on a mortgage, personal loan or credit card, and wind up paying more during the term of your loan. But if you establish a good credit score, you can save money on interest payments and use the savings to invest in your future.
What are the two things that have the biggest impact on your credit score? ›
Your credit score is important in getting approved for loans and getting the best interest rates. Different scores take different factors into account, but the most commonly used score, the FICO Score 8, places heavier weight on credit utilization and payment history.
