A credit score is a three-digit number designed to rate a person’s creditworthiness. It is typically between 300 and 850, based on one’s credit history, repayment history and other information. It generally reveals the likelihood of a person repaying loans on time.
Table of Contents
Creditors and lenders in the United States and other countries will use your credit scores to determine the likelihood of you repaying loans promptly, and it’s a core consideration when deciding if or not to approve the person for a new application. Basically, the higher your credit score, the more likely you are to get approved for loans and better rates.
What Does The Data Say Credit Score About U.S. Citizens?
Data compiled by a market research platform, gitnux, revealed that about 33% of adults in the United States have a bad FICO credit score, translating to 300 to 620. The research further revealed that medical bills negatively affect approximately 43 million Americans.
A creditor defines their ranges for credit scores as well as the basis attached to each category. Nevertheless, generally, a loan application will most likely be declined by a lender if the applicant has lower scores.
The Importance of Credit Scores for Lenders
The credit score of a person makes it easy for lenders to determine if they should approve their loans or not. Lenders in the U.S are more likely to approve a loan for a person with a higher credit score, and vice versa.
Additionally, a lot of lenders won’t hesitate to grant better interest rates to individuals with a higher credit score.
Lenders will regard a credit score of 700 or above very positively, and it may earn a lower interest rate for the applicant. When a person has a score that is above 800, it is much more valuable.
Here are the typical ranges for how credit scores are grouped by lenders:
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
How Your Credit Score Is Calculated
In the USA, three major credit bureaus (Equifax, Experian, and TransUnion) are very famous in the business of reporting, updating, and storing details about consumers in the credit markets.
Here are the core factors they take into account when it comes to calculating a credit score:
Payment history
The consumer’s payment history is the cardinal factor put into consideration, and things such as if the person offsets their previous loans on time, how many late payments they have had, etc.
Amounts owed
This simply represents the percentage of credit a consumer has used in comparison to the credit available to them. It is the second cardinal factor that influences one’s credit score.
Length of credit history
Longer credit histories are seen as being less risky. This is so due to the broad availability of more data to help determine payment history.
Credit mix
When you have various forms of credit types, such as credit cards, car loans, etc, one of the messages it passes across to creditors is that you have what it takes to manage a variety of credit types, and it impacts your credit score as well.
New credit
When a person has a lot of recent applications for credit, it makes lenders feel they are too desperate, and it can have a damping effect on the person’s credit score.
Good Habits To Help You Grow Your Credit
Since your credit score can affect your financial life, it is therefore important to inculcate and keep to excellent habits that can help you grow your credit.
First, you need to ensure you keep paying your loans on time, as this is one core factor for a great credit score.
Additionally, you should be devoted to paying balances in full as much as possible, and avoid carrying debt if you aim at growing your scores. In instances when you can’t help but carry balances, then make a faithful commitment to pay them down as fast as you can.
Try to use your credit accounts regularly, although it should be as light as possible. You should charge nothing above 30 percent of your credit limit on your cards.
If you want to keep improving your credit, then you should avoid closing accounts. When you successfully pull your scores to over 700, you can then decide to stick to very few accounts without causing damage to your credit.
Summary
Since your credit score is a core factor in a lender’s decision to offer you credit, it is important to sustain a positive credit score as it is a key mechanism for evaluating your creditworthiness.
You should be aware that your credit scores can significantly affect your financial life and should be treated with care and planning.