Growing up, you may have heard that it’s good to have a high credit score, but never really knew what that meant. Your credit score is extremely important because it will be the biggest determining factor in deciding whether or not you will receive a loan from a lender.
Let’s take a look at exactly what a credit score is.
Credit score, defined.
Your credit score is a number, usually between 300-850, that measures the likelihood that you’ll pay back your loans in time. Credit scores are used be lenders to see if you are a reliable borrower. This is important when you’re looking to open a new credit card account, take out an auto loan, or sign onto a mortgage.
What goes into your credit score? Investopedia breaks down 5 core elements that are used to measure your credit score:
- Payment history: a timeline of how well you have paid off your loans and debts
- Total amount owed: measured by your credit use, or the amount of credit that is available to you that is currently being used
- Types of credit: how many forms of credit you are using, such as car loans, mortgage loans and credit cards
- New credit: how many new accounts you have, and how many you have applied for recently
Here’s a breakdown of how each of these factors are weighed in determining your overall credit score:
Who determines your credit score?
In the world of credit scores, there are creditors and credit bureaus. Creditors, also called lenders, are the people that want to check your credit score to make sure you’re a responsible borrower. These are banks, credit card companies, car dealerships or mortgage lenders.
Credit bureaus, meanwhile, are companies that track your spending and credit history to build reports, which they sell to creditors. There are three primary creditors in the U.S.: Experian, TransUnion and Equifax.
What is the scale for measuring credit score?
As we mentioned, your score is usually measured on a scale of 300-850. The reason this might vary is because not every lender will use the same combination of credit bureaus in compiling their evaluation of you. Some may use one, two or all three, according to Equifax.
Investopedia also provides a breakdown of how you are rated as a borrower, depending on your credit score:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
Credit scores are important because they determine how trustworthy you are as a borrower. If you are looking to take out a loan, you’ll want to ensure that you have a solid credit score.