By: Sammi Coppedge, Marketing Assistant
Most everyone has heard of a credit score, but that doesn’t mean that everyone knows what all they entail and the effects of a bad credit score. A bad credit score could mean the difference between an approved loan and a disapproved one. It can also mean a high interest rate versus a low interest rate. In simple terms, a bad credit score could make the difference between getting your dream home or not. It could also make the difference between purchasing a new car versus a used one.
What exactly is a credit score?
A credit score is a three digit number generated by your credit report. It specifically looks at your risk to determine the likelihood that you’ll become delinquent on your credit responsibilities.
The higher your credit score is, the better. A high credit score means that you are considered to be less risky. Credit scores range from 300 to 850, although a perfect credit score is nearly impossible to achieve. A good range to aim towards is 700 to 750.
While there are numerous credit-scoring models, the most popular one is the FICO credit score. According to their website, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.”
Furthermore, there are three major credit bureaus: Equifax, Experian, and TransUnion. Equifax and TransUnion each report a separate credit report to FICO. Experian no longer works with FICO to report credit scores.
What is a credit score made up of?
There are five factors that go into a FICO score, although categories are weighed differently. For example, payment history and debt owed are weighed heaviest. The following are the categories that go into a credit score:
- Payment History: (35 percent) – This is all about account payment history, this is why it is so important to make your payments on time. This also includes any delinquencies on accounts.
- Amounts Owed: (30 percent) – This is how much you are currently in debt.
- Length of Credit History: (15 percent) – How long your accounts have been opened
- Types of Credits Used: (10 percent) – The different mix of accounts you have opened, such as revolving credit and installment.
- New Credit: (10 percent) – This mostly deals with credit inquiries and number of recently opened accounts.
How can I check my credit score?
Every person is guaranteed the right to a free credit report annually, as mandated by federal law. To avoid paying a fee, you should never provide your credit or debit card information on a credit report site. One great site to use is www.annualcreditreport.com. Be sure to review all terms and conditions whenever on a credit report site.