Most adults have at least a passing understanding of how one's credit score works. But in order to take full advantage of the system, you must know more!

Around 16% of Americans have a poor credit score. In fact, only 1.2% of Americans have a perfect FICO score of 850. But what does this all mean and why is your credit score important?

If you’re considering getting a loan, trying to get your finances in order, or simply want to understand your credit score, you’ve come to the right place.

Check out this complete guide to credit scores and work on improving yours today for a better life!

What Is a Credit Score, Anyway?

In the most simple terms, your credit score tells lenders how likely you are to pay back your debts on time. It is based on how much of a risk you are as a borrower. It’s a three-digit number that has the potential to influence a lot of things in your life (more on that later). 

A common misconception is that you only have one credit score. However, you likely have multiple credit scores because there are multiple credit bureaus. These bureaus are keeping track of your credit reports and using different methodologies to calculate the score. 

The most well-known scores that you should keep track of are FICO Score and VantageScore. These are the bureaus that most lenders use, so they are the scores that are important to you. 

How Your Credit Score is Calculated

So, there’s this little number that has such power over your life and personal banking. How does that number come to exist? It all starts with credit reports. These are dynamic, frequently updated reports that are based on your credit behavior.

The credit bureaus obtain the information used to create these reports from lenders. The reports comprise of the opened, active, and closed accounts that you have — such as mortgages and credit card accounts — and specific information about these accounts. 

It also includes credit inquiries and public records and collections, such as bankruptcies and foreclosures. Of course, general information about you, including your occupation, salary and spending habits, is also in the report. 

All of this complex and thorough information is then used to calculate your credit score. Each bureau has different algorithms to do this. 

A Good and Bad Credit Score 

You go online and see your credit score, but it’s just three obscure numbers that don’t mean much to you. Now’s the time to find out.

FICO Score and VantageScore credit scores fall in the 300 to 850 range. 300 is the lowest (very poor credit score) and 850 the highest (excellent credit score).

FICO Score credit ranges are as follows:

  • Very Poor – 300 to 579
  • Fair – 580 to 669
  • Good – 670 to 739
  • Very Good – 740 to 799
  • Excellent – 800 to 850

While VantageScore credit ranges are:

  • Very Poor – 300 to 499
  • Poor – 500 to 600
  • Fair – 601 to 660
  • Good – 661 to 780
  • Excellent – 781 to 850

As you can see, a good credit score differs slightly depending on the bureau. There’s no way to predict which credit score your lender will look at, so it’s always good to aim for the best possible score. 

Factors that Impact Your Credit Score 

There are a couple of important factors that affect your credit score. The first and most influential is your payment history.

If you consistently make on-time payments, you will be recognized as being more trustworthy, as you’ll likely pay back your debts in the future. Missed payments, on the other hand, may be recorded as a ‘negative’ record on your credit report. 

Credit card utilization is the next important factor. This is essentially the amount of your credit card limit that you’re using. The lower the better. 

Other factors include the age of credit and established credit history, credit mix and the number of accounts in use, hard credit inquiries, and new credit. 

Learn more here about factors that affect your credit score. 

Why is a Credit Score Important?

This is what it all comes down to. The importance of credit score in your personal life. Your credit score tells people how reliable and trustworthy you are when it comes to finances. It tells people how much of a risk you are. 

So, why does this matter? Well, when you’re trying to secure a large-ticket bank loan, such as a home mortgage, your credit score will determine whether you qualify for the loan and how high your interest rates will be. I

If you have a poor credit score, you may not obtain the loan, and if you do secure the loan, it will come with high rates. 

Your credit score impacts your credit card finances, car financing, online loans, insurance premiums, cellphone systems, and so much more. It can even affect whether you receive a job offer or are accepted as a tenant in a new home. 

Having a good credit score gives you access to more opportunities and saves you a lot of money. 

How to Improve Your Credit Score 

First of all, make sure to regularly check your score so that you know what you’re working with. Ensure that you make payments on time, optimize your credit utilization ratio, and carefully consider taking on new debts and accounts. 

If you have a poor credit score, it’s important that you cover all your late payments as soon as possible. 

Are You Happy With Your Credit Score?

Now that you know what those three little numbers mean and how they impact your life, are you happy with your credit score? It’s important to maintain a good credit score or work to improve a poor one. The impact that your credit score has on your life is quite considerable. And you want it to be a good one. 

Did you find this post interesting? Our site is full of finance content to help you navigate your personal finances — keep exploring for more articles!

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