Understand Your Credit Score and How It Affects You

Understand Your Credit Score and How It Affects You

January 8, 2020
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Understand Your Credit Score and How It Affects You

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Your credit score plays an important role in your financial life and beyond. Find out what affects your credit score and how you can improve it.

You know that your credit score is important, but understanding what it is and how it affects you may not be that clear. Your credit score plays an important role in more than just your financial life. This number can impact your ability to buy a house, rent an apartment, purchase a vehicle, and much more. Finding out your credit score is an important step towards improving your credit-worthiness and saving you money in both the short and long term.

What’s My Credit Score?

Before you can find out your credit score, you need to know which one you’re looking up. Lenders use various credit scoring models to determine an individual’s credit-worthiness, but there are two main consumer credit scores that lenders use, FICO and VantageScore. The same factors influence both scores but each uses its own formula for calculations.

Your score may vary with each company, but it can also be exactly the same and yet mean something different for each one. What’s considered a good FICO score could be considered just fair with VantageScore. Knowing your number from these two companies before applying for a loan or a credit card can give you greater insight. Services like CreditSesame can help you get your report and score for free, and also provide you with personalized advice on things you can do to improve your score. It helps you understand how lenders will view you as they determine whether or not to extend you a loan and under what terms and conditions.

A Closer Look at Credit Score Ranges

While your exact credit score can fluctuate, knowing your credit score range gives you an idea of how you may fair when applying for credit products. It’s important to keep it in mind before seeking a home loan, purchasing a new vehicle, applying for a credit card, etc. Your credit score will fall within a range from 300 to 850. For FICO, a score of 670 or higher is considered good. Scores of 800 to 850 are exceptional. For VantageScore, a score of 700 or higher is considered good. Scores of 781 to 850 are excellent. Let’s break down the ranges further for each:

FICO Credit Score

300-579 – Very Poor

You’re not likely to be approved for a loan or a credit card. A deposit may be required for an unsecured credit card. If a lender does approve a loan, the interest rate will likely be higher and the loan terms not as favorable.

580-669 – Fair

While you may get approved for loans or credit cards, you’re considered a subprime borrower and will likely have fewer options. Interest rates will typically be higher.

670-739 – Good

You’re considered a much lower risk to lenders and are likely to be approved for credit. Interest rates will be better for applicants with a credit score in this range.

740-799 – Very Good

Approval for loans and credit cards is highly likely with favorable terms and lower interest rates, as well as an extended repayment period.

800-850 – Excellent

You’ll qualify for the lowest interest rates and best terms available.

VantageScore Credit Score

The 3 major credit reporting agencies in the US, Experian, TransUnion and Equifax have developed the VantageScore. It’s used by many lenders today and is available to consumers for free. The range is the same as FICO, 300-850, but the breakdown of the ranges varies slightly.

300-499 – Very Poor

You’re not likely to be approved for credit.

500-600 – Poor

You might be approved for credit but likely with unfavorable terms. You may only qualify for secured credit cards, which require you to pay a fee or give a deposit.

601-660 – Fair

You have a fair chance of being approved for a loan but with a higher interest rate.

661-780 – Good

Approval for loans with favorable rates and terms is likely.

781-850 – Excellent

You stand a great chance of being approved for loans with the best rates terms available.

What Affects Your Credit Score

Once you have the answer to the question of what is my credit score, you can use it as a starting point for monitoring and improving it. You can take steps to raise your score over time, which will have a positive impact on your financial future. There are a number of factors that affect your credit score, including:

  • Payment history for credit cards and loans. This factor is the most significant because it shows lenders whether you’re a responsible borrower. Lenders want to see that you make your payments on time for things like credit cards, student loans, personal loans, mortgage, and car loans. The number of late payments that you’ve made will have a negative effect. Making payments on time is critical to maintaining or improving your credit score. For many people, rent payments are one of the most consistent payments they make, but may not factored into their score. RentCreditHero can help submit this data to the credit bureau, which can help improve your score.
  • Credit utilization and your total amount of debt. This number is an indicator to lenders of how much of a risk you may be as a borrower. Your credit utilization is calculated by taking the total amount of credit that you’ve been offered by lenders and how much of that credit you have used. Ideally, your credit utilization rate should be around 30% or less.
  • Credit History. When it comes to the age of your credit history, the longer you’ve had accounts open, the better. The age of your oldest credit account is considered, as well as the average of all of your accounts. Since credit history is a factor in your score, it’s recommended not to close older accounts, even if you aren’t actively using them. Simply keeping the account open will help your score.
  • Credit mix. Lenders like to see a mix of credit types, including credit cards, which are revolving debt, and installment loans, like mortgage debt, student loans, and car payments. It’s a good idea to have a credit mix to demonstrate that you can responsibly manage both types of repayments.
  • Recent credit and inquiries. This is the least important factor but lenders will still be interested in seeing if you’ve had any recent hard inquiries on your credit report. These hard inquiries are often done when you seek some kinds of credit and will show up on your report. They can take a few points off of your overall score but it will eventually go up again as they age.

Your credit score is an important number, and it’s one that can and will change over time. If your current score isn’t in the range where you’d like it to be, there are effective ways to make improvements that can boost your score in both the short and long term. Understanding how your score affects you allows you to make choices and take actions that will positively impact your financial health.