What Is a Credit Score and Why Is It Important?

Have you ever asked yourself: What is a credit score and why is it important? Learn more about the significance of your credit score here.

Do you ever feel like an arbitrary number that you don’t really understand controls the decisions you get to make as an adult? 

You’re not alone. 

What is a credit score? Why is it important? 

The answers to these questions will help you know that you have control over that arbitrary number. Once you know how that number works and how it affects your ability to make financial decisions, you are back in control!

Read the rest of this article for a basic understanding of your credit score!

What is a Credit Score?

Lenders and financial institutions use a three-digit number called a credit score to assess the level of risk when lending money.  Whether it’s credit limits for a credit card, interest rates, or loan approval, your credit score can affect if and how a lender chooses to do business with you.

How your score is calculated helps them know if the risk of lending you money that you may or may not pay back is worth it. Your credit score is based on the following information:

  • Length of credit history (how long have accounts been open?)
  • Payment history (do you pay your bills on time?)
  • New credit requests (how often do you search out new credit?)
  • Amounts owed vs available credit (where do you keep your balances at?)
  • Credit mix (do you have different types of credit accounts–credit cards, auto loans, etc?)

Each of these categories is weighed a little differently and can affect whether your credit score goes up or down. But how do you know if your credit score is good or bad?

What is My Credit Score?

The main companies that calculate credit scores based on the original FICO model are Transunion, Equifax, and Experian. You are entitled to a free credit report from each company every year.

The number of your credit score will range from 300-850. Understanding where your score is on this spectrum and how lenders might look at it can help you know what changes you may need to make. 

  • What is a bad credit score? A number below 580 indicates a very poor credit score. Scores in this range are typically too risky for lenders. 
  • What is a fair credit score? A fair credit score ranges from 580-669. You are more likely to get credit, but expect higher interest rates and lower limits. 
  • What is a good credit score? A score from 670-739 is considered a good score.  You will be able to get credit with decent limits and interest rates.

Credit scores 740 and higher are very good to excellent and will afford the best interest rates and higher limits. You can improve your credit score. If you need help some companies offer those services, such as the one in this link

You Are in Control

Now that you know how to answer the question, “What is a credit score?”, you can decide what will best help you improve or maintain yours. Remember the things that affect your credit score, make good choices in those areas, and watch your number improve. 

Check out other articles on our site for more answers to your questions!

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