April 21

What is a credit score?

Credit, Credit Scores

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Forget about your phone number or age. Your credit score is probably the most important number in your life. Banks and other lenders use this number if you want to take out a credit card or loan for, say, a place to live. A high credit score provides you with financial freedom. A low credit score can stop you from getting all the things you want in life, such as a home or car.

If you're not sure what a credit score is, you are not alone. Four out of ten Americans have no clue how credit scores work. This is probably because there's so much misinformation out there, making things confusing. This short page will clear up all the confusion once and for all.

If you want to know how credit works in general, check out this simple guide first and then come back to this page.

OK, So What Exactly is a Credit Score?

A credit score is a number based on your previous credit history. Lenders use this number to predict how likely it is you will pay back a credit card or loan on time.

  • If you have a high credit score, you might find it easier to get a credit card or loan. This is because lenders might think you are more likely to make repayments in the future because of your previous credit history.
  • If you have a low credit score, you might find it harder to get a credit card or loan. This is because lenders might think you are less likely to make repayments in the future because of your previous credit history.

There's a little bit more to it, but that's the general idea. Think of a credit score as a grade on a school paper.

"A credit score is a number that rates your credit risk. It can help creditors determine whether to give you credit, decide the terms they offer, or the interest rate you pay. Having a high score can benefit you in many ways."

— USAGov

It's important to note that you don't just have one credit score.

Different credit bureaus use different credit scores because they don't always have access to all your previous credit data. Credit bureaus are companies that collect credit information from various lenders and keep this information in one place.

The three most popular credit bureaus are:

Your credit score at Experian might look different from your credit score at Equifax, for example. This is because credit bureaus use different scoring models to calculate your credit score.

How is a Credit Score Calculated?

As mentioned above, credit bureaus use scoring models to work out your credit score. These are mathematical formulas that take into account different factors such as:

  • Previous loans, credit cards, and other types of credit you have had in the past.
  • Whether you made/make repayments on these loans and credit cards.
  • How long you have owned these loans and credit cards.
  • How many credit applications you have made recently.
  • How long your credit accounts have been open.
  • How much unpaid debt you have.
  • Whether your debt was sent to a debt collections company.
  • Whether you have been/are bankrupt.

All of this information (and other factors) determines your credit score. Every time you apply for a credit card or loan, the lender will use your credit score to decide whether:

  • They should give you a credit card or loan.
  • How much money they should give you. (This is called your credit limit.)
  • How much interest you will pay on the credit card or loan.
  • How long you will have to repay the credit card or loan.

TIP: It's important to know that your credit score is constantly changing. This is because you might be making repayments on loans and credit cards (or applying for new credit) every month.

"Companies use credit scores to make decisions such as whether to offer you a mortgage, credit card, auto loan, or other credit product. They are also used to determine the interest rate you receive on a loan or credit card, and the credit limit."

What Do Credit Scores Look Like?

Again, it all depends. Different credit reference bureaus weigh credit scores differently, so you might have a higher credit score with one and a lower credit score with another.

As a general rule, most credit scores range from around 300-850.

  • A score of around 300-500 is generally considered "low."
  • A score of around 500-700 is generally considered "somewhere in the middle."
  • A score of around 700-850 is generally considered "high."

Remember, the higher your credit score, the more likely it is you will receive a credit card or loan (and receive a higher credit limit and more favorable repayment terms.)

What are VantageScore and FICO Scores?

VantageScore and FICO Scores are two of the most popular credit scores that many lenders use. They work in the same way as all the other credit scores. The higher your FICO score, for example, the more likely it is you will get the credit you want.

Base FICO Scores range from 300-850 and industry-specific scores range from 250-900. The latest VantageScore ranges from 300-850.

Low Credit Score?

If you have a poor credit score, it's OK. The good news is that you can improve your credit score. You can do this in a number of different ways:

  • Make credit card and loan repayments on time.
  • Pay off/reduce any outstanding debts.
  • Don't take out too much credit at the same time.
  • Use a service like Credit Innovation Group.

This is a lot easier than it sounds, and you could improve your credit score in a short amount of time. You can also get a credit card, even if you have a less-than-perfect credit score. However, you might need to pay more interest.

Final Word

As you can see, credit scores can take a little while to get used to. However, it's important to know that you can always improve your credit score. If you have a poor credit history or no credit history at all, you probably want a higher credit score. Here at Credit Innovation Group, we help you develop something called a credit profile, which lets you secure the credit you need.

About the author 

Credit Innovation Group

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