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What is Your Credit Score?

A credit score is a number that falls somewhere between 300 and 990 that lenders will use to evaluate you as a borrower. The exact range for credit scores differs based on different companies, but the most commonly used bureau, FICO, reports scores on a scale of 300 to 850. Their main competitor, VantageScore, reports scores on a scale from 501 to 990.

Companies that report credit scores will first gather all of the data and information relevant to your history as a borrower. They will then come up with a numerical credit score for you based on lots of different factors like your outstanding loans and payment histories.

Each time you want to borrow money, the bank or money lender will first need to check your credit score. If you have a very good credit score, you will probably have a low interest rate and you may be able to get a rewards credit card. You will also be more likely to get approval for a loan. If your credit score isn’t as good, you may only be eligible for a credit card or a loan with a very high interest rate, annual fees, and strict limitations. Sometimes banks won’t even give you a loan if your credit score is too low.

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What are good and bad credit scores?

The definition of a good credit score varies based on the lender. However, a good score usually refers to a score of 720 or better on the FICO scale.

An average score is a score somewhere between 620 and 720 on the FICO scale. However, for some lenders a score of 680 is considered the bottom of average.

A bad credit score is usually a score below 620 on the FICO scale.  

How is your credit score calculated?

FICO won’t release the specific equations that they use to come up with your credit score, but they have released a listing of the factors that they consider, and the relative weight of each of the factors in determining your credit score.

  • Payment history: 35%
  • Outstanding debt: 30%
  • Age of your credit history: 15%
  • Newly acquired credit sources or recent inquiries: 10%
  • All of your sources of credit: 10%

Your payment history is like a log of all of your past payments on any credit or loan. Credit reporting companies want to see that you have a good history of paying back your loans in a timely manner, and that you haven’t accumulated too much interest on any loan. If a credit reporting company determines that you have good habits as a borrower, it can raise your credit score significantly.

Your outstanding debt is the accumulated amount that you owe through all of your loans and credit cards. If you currently owe a lot of money, you may seem like a higher risk borrower, especially if the amount you owe looks too high for your salary.

A credit reporting company will consider the age of your credit history to see if your borrowing habits have been consistently good, consistently bad, or have fluctuated a lot. The best case scenario is a long credit history of consistently good payment habits.

The credit reporting company will also consider the average age of your credit history. They calculate the average age by looking at how long you have had each loan or credit card. You want to have an older average age for your credit history because a young credit history means you don’t have as much proof of your good borrowing habits.

Newly acquired loans or credit cards can negatively affect your credit score and the average age of your credit history. If you have recently applied for a new loan or credit card, it sets off some alarm bells for credit reporting companies because it may look fishy if you need a lot of new credit. It also means that you have taken on the responsibility of a new monthly loan or credit card payment which may affect your ability to make payments on other loans.

New credit cards and loans will also lower the average age of your credit history which will negatively affect your credit score because it will reduce some of the impact of another credit with a long life and good payment history. However, the impact of a new credit card on your credit score is short. Afterall, credit companies understand that you may really need to get a new credit card.

You should also be aware that too many credit report inquiries from lenders and credit card companies will negatively affect your credit score. However, credit reports count all inquiries made within the same 14-day period as 1 inquiry to allow you to shop around among lenders without fear of hurting your score.

This also doesn’t include any credit report inquiries that you make yourself.

Finally, credit reporting companies will consider all of your different loans and credit sources. These can include, for example:

It can negatively affect your credit score if you have too many sources of credit. However, it can also improve your credit score if you can demonstrate that you have a good history with lots of different kinds of loans.

How do you find out your credit score?

You can find out your credit score through a number of different credit reporting companies. You can get a free credit report with each of the primary credit bureaus:

  • FICO
  • Equifax
  • Experian
  • TransUnion
  • Innovis
  • PRBC

The Fair Credit Reporting Act ensures that you have the right to see your credit report for free once a year, or whenever you have been denied a loan because of your credit score. However, you should note that a free credit report does not include a free credit score. You frequently have to pay a fee, usually around $10 to $20 to see a credit score.

Free Credit Score

There are lots of companies that claim to offer free credit scores. If you want to use one of these score reporting services, be sure to read the fine print. Many times, the company will offer you a free trial period in which you can view your credit score, but if you don’t cancel your membership before the trial ends, you will be automatically upgraded to a paid plan.

You should also be sure that you are using a secure and fully licensed company. You will need to give the company a lot of sensitive information about your credit cards and loans, and you definitely don’t want this information to end up in bad hands.

How to Improve your Credit Score

There are lots of ways that you can improve your credit score, but it all depends on the particulars of your case. If your main issue is that you have a very young credit history, you may want to wait a while before you try to get your next loan or credit card to make sure you can build up a mature payment history.

Another way that you might be able to improve your credit score is to get a bad credit credit card or bad credit loan. These credit cards and loans may come with hefty interest rates and annual fees, but if you can bite the bullet and pay for these hefty fees for a whole year and make all of your payments on time, you can start to improve your credit score. And after a year of good payment habits, you may be able to reduce your annual fee and interest rates, or you may qualify for a better credit card or loan upgrade.

However, you should note that some of these loans and credit cards can end up doing you more harm than good. For example, a pay day loan won’t do much, if anything, to improve your credit score, and the interest payments can stack up quickly. Be sure to read all the fine print before signing up for any bad credit loans or credit cards.