Are you new to credit scores, or just need a refresher? We’ve put together some basic information below on what a credit score is, how it’s calculated, and why it’s important to you.
What is a Credit Score?
- A credit score is a three-digit number that shows how reliable you are at paying back borrowed money. It ranges from 300 to 850, with higher scores being better.
- Your credit score is based on your credit history, including how often you pay bills on time and how much debt you have.
- Lenders, landlords, and even some employers use this score to decide if they will give you a loan, rent you an apartment, or hire you for a job. A good credit score can be helpful to you.
How is a Credit Score calculated?
A credit score is calculated based on five main factors:
- Payment history (35%), which looks at whether you pay your bills on time.
- Amounts owed (30%), which considers how much debt you have compared to your credit limits.
- Length of credit history (15%), which accounts for how long you’ve had credit accounts.
- New credit (10%), which examines recent credit inquiries and new accounts.
- Credit mix (10%), which looks at the variety of credit types you have, such as credit cards, mortgages, and loans.
What is a Credit Bureau?
- A credit bureau is a company that collects and maintains information about your credit history.
- In the US, the three main credit bureaus are Experian, Equifax, and TransUnion.
- They gather data from banks, credit card companies, and other lenders to create your credit report.
- This report includes details about your loans, credit cards, and payment history.
- Lenders, landlords, and employers use this information to assess your creditworthiness, helping them decide whether to offer you credit, housing, or a job.
How do Credit Bureaus work?
- Credit bureaus collect and maintain information about your credit activities from lenders, banks, and other financial institutions.
- They compile this data into a credit report, which includes your payment history, amounts owed, length of credit history, new credit, and types of credit used.
- This report is then used to calculate your credit score, a number that reflects your creditworthiness.
- Lenders, landlords, and employers use this report and score to decide whether to offer you loans, credit cards, housing, or jobs.
Why is my Credit Score important?
- Your credit score is important because it affects your ability to receive loans, get credit cards, and rent apartments.
- A higher score can help you get lower interest rates on your loans, saving you money.
- Landlords and employers might check your credit score to see if you are reliable.
- Insurance companies may also use it to set your premiums.
- Overall, a good credit score opens up more financial opportunities and helps you secure better terms for various services and products.
