A credit score is a numerical representation of an individual’s creditworthiness, which is based on their credit history and financial behavior. It’s used by lenders, such as banks, credit card companies, and mortgage lenders, to assess the risk of lending money or extending credit to a borrower.
Credit scores are typically calculated using information from the individual’s credit report, which is compiled by credit bureaus (also known as credit reporting agencies) such as Equifax, Experian, and TransUnion. The most common credit scoring models used in the United States are FICO® Scores and VantageScores®.
Key factors that influence a credit score include:
1. Payment History: This is the record of whether you’ve paid your bills on time. Late payments, delinquencies, or accounts in collections can negatively impact your credit score.
2. Credit Utilization: This refers to the amount of available credit you’re using. Keeping credit card balances low relative to your credit limits can positively impact your credit score.
3. Length of Credit History: The length of time you’ve had credit accounts open, as well as the average age of your accounts, can affect your credit score. Generally, a longer credit history is viewed more favorably.
4. Types of Credit: Lenders like to see a mix of different types of credit accounts, such as credit cards, installment loans, and mortgages. Having a diverse credit mix can positively impact your credit score.
5. New Credit Inquiries: Each time you apply for new credit, a hard inquiry is added to your credit report, which can temporarily lower your credit score. Multiple recent inquiries can indicate higher risk to lenders.
Credit scores typically range from 300 to 850, with higher scores indicating lower credit risk. A credit score above 700 is generally considered good, while scores above 800 are considered excellent. On the other hand, scores below 600 may be seen as subprime or poor credit.
Having a good credit score can make it easier to qualify for loans and credit cards, obtain favorable interest rates, and access other financial opportunities. It’s important to monitor your credit score regularly and take steps to maintain or improve it by practicing responsible credit habits, such as paying bills on time, keeping credit card balances low, and managing credit accounts wisely.