What is a credit score?
If you’ve ever applied for a cell phone, tried to get a new job or moved into an apartment, you probably already know what a credit score is. In order to buy, rent or lease almost anything of value, you need to be considered trustworthy with money and reliable when it comes to making good on money that you owe. The way that most lenders find out how you handle debt is through your credit report, which delivers them a credit score that indicates how well you manage your money and debt.
Credit scores are valuable to lenders and may determine everything from your next car to your next job (employers also use credit checks as a means of checking up on your background) so get familiar with how your credit score is calculated and what the three-digit number means to your life.
The range of a credit score
The most common type of credit score is a FICO score. FICO scores range between 300 and 850. The higher your score, the more a lender will trust you with debt and believe in your ability to repay a loan. Typically, those who have a credit score that falls below 600 are believed to have poor credit, while anyone with a score over 730 is said to have excellent credit. But there is a middle ground where most Americans reside. Anything between 700 and 729 is above average, 670 through 699 is good and 585 through 669 is fair. The goal is to keep your credit score as high as possible in order to ensure that potential creditors seriously consider you for future loans.
Understanding your credit score
Knowing what your credit score is and how to improve it is very important in today’s economy. Watch this clip to learn more about credit scores.
Video: Your Credit Score (Bloomberg)
How your credit score is calculated
Your credit score is calculated through many factors that all relate to how you handle money, manage debt and ultimately deal with credit. Here are just a few of the factors that help determine your credit score.
The amount of credit you have out in your name: Do you have 10 credit cards and a bunch of loans with overdue balances? Chances are it’s hurting your credit score. While it never hurts to maintain a healthy level of credit, you don’t want too many different types of debt on your credit report. It all goes into the equation when your score gets calculated.
Your overall reputation when it comes to paying down debt: Whether you pay debt back on time is important to creditors, so your credit score is partially calculated by how many late payment notices you’ve received or how consistently you’ve paid off your debt.
Any loans you have cosigned: If you’ve vouched for a loan for someone else in the past, this will show up on your credit report and affect your credit report.
Bankruptcy: Filing for bankruptcy essentially destroys your credit score and remains on your credit report for up to 7 years. This is why so many people say bankruptcy should only be used as a final option if you run into any financial troubles.
Everything else you own: From your house, which usually requires a mortgage, to your cell phone, which requires a monthly contract, there are plenty of things you use everyday that affect your credit score. If you were to sit down right now and make up a list of every bill you currently have in your name, you’d like find dozens of items in your life that help or hurt your credit score. It’s one reason you really need to educate yourself about your credit score and find ways to improve it over time.
Got a case of the credit score blues?
Worried about your credit score? This funny clip features a music video poking fun at credit scores. Of course, your credit score is important, but realize that everyone is going through the same battle you’re going through, too.
Video: The Credit Score Blues
What a good credit score means to you
Whether you’re 18 and going off to college or 80 and enjoying your retirement, good credit is something that should be treasured. It opens up hundreds of doors in your life and allows you to do so much more than those with bad credit. And the best part about a credit score? It can always be improved. Making payments on time, trimming debt effectively and staying on top of your credit report are just a few ways you can prove how reliable you can be. It may not matter today, but someday when you go to buy a house, a car or even just a new cell phone plan, you’ll be able to do it because of your good credit score.