A credit score is a numerical expression of your creditworthiness. In other words, it’s used to gauge how likely you are to repay your debts. Lenders and credit card companies use credit scores to determine how much money they will loan you, as well as how much interest they will charge you on top of the original loan amount.
The higher your score, the more money financial institutions will lend you at a lower interest rate. If you have a low credit score, you’re more likely to be loaned less money and at a higher interest rate.
What is considered a good credit score?
Credit scores typically range from 300 to 850. Anything below 600 is considered “poor” credit. A score ranging between 600 and 699 is “fair,” and 700 and above is considered “good.” Those who reach 800 and above are considered to have “exceptional” credit.
What factors determine credit score?
- Payment history (missed or late payments).
- Credit utilization rate (how much debt you have). This looks at how much of your available credit you’re actually using. If you use over 30% of your available credit, that may lower your score.
- Age of credit accounts (how long you’ve had credit). Generally, the longer you’ve had credit, the higher your score.
- Credit mix (how well you manage different credit types: credit cards, a mortgage, student loans, etc.).
- New credit, or hard, inquiries (how recently you opened or applied for credit). Generally, too many accounts or inquiries can negatively impact your score.
What is a credit report?
Most of the information above can be found in your credit report. Your credit report is a history of all your credit accounts and transactions. It will list your past and present credit cards and any loans that have been in your name, whether you’re still paying on them or not. Credit reports also show payment history, so avoid missing payments or paying bills late, as those incidents will lower your credit score.
Hard inquiries are also shown on the report, so if you applied for a store credit card and were denied, it will still show up on your report and can negatively impact your credit score.
How to check your credit score and report
Checking your credit score and your credit report annually helps to ensure that there hasn’t been any unauthorized activity on your accounts. This is a great way to check if you’ve been a victim of identity theft. If you notice a mistake on your credit report, file a dispute with one of the three credit bureaus (Experian, Equifax, or Transunion) as soon as you realize the mistake.
Many credit card companies give their customers free access to their credit scores and update them when the score has increased or decreased. If your credit card company doesn’t offer this service, try Credit Karma. The service is free, and it even offers tips for improving your credit. Checking will not negatively impact your credit score. You can also review your credit report for free at annualcreditreport.com.
Having this information before you make a big decision like buying a house or a car is very helpful. If your credit is in good shape, then proceed with the process. If you find that your credit isn’t in the best shape, you may want to focus on paying off debt and avoid opening new lines of credit for a while. This will save you money on interest and increase your chances of being approved for the home or car of your dreams.