What is a Credit Score? : A Complete Explanation

What is a Credit Score? : A Complete Explanation

What is a Credit Score? : A Complete Explanation

Your credit score affects pretty much everything that you do but not everyone understands how it can affect your life. Simply defined, your credit score determines how the credit bureaus view your ability to be trustworthy and responsible with your finances and to see if you are paying your bills on time.

A high credit score means that you are responsible and trustworthy. The higher your score is, the more likely you are to be approved for a credit card or loan. A high credit score means you pay your bills on time and consistently, as well as maintain low balances on all your credit cards.

And if you apply for large loans and a large credit limit, the interest rate will be lower. Why are some people paying larger interest than others? 

Well, banks also need incentives so that they can loan to people who have low credit scores. Those who have low credit scores are going to pay higher interest rates because apparently, they are riskier to loan money too because of their past history with their creditors.  

But if your credit score is high, you can save money on your monthly payments because your interest rates are lower. See how having a high credit score affects you? A good credit definitely comes with its benefits.

Now that you have a better understanding of credit score and credit score definition, let’s dive in next to how it is calculated and how to make it higher!

How is your score calculated?

Your FICO score is the most popular score and almost 90% of all lenders rely on it. FICO utilizes a complex method to calculate your credit score.

A score ranging from 800-850 is in the ‘exceptional range’ while 740-799 is in the ‘very good’ range. If your score is 670- 739, then that’s ‘good’ while 580-669 is ‘fair’ and 579-300 is already ‘very poor’. 

Your goal should be to keep your score in the good and excellent range. As you can see, the higher your credit score is, the better. And the higher your credit score, the more financial opportunities will be opened for you.

Here are the things that make up your credit score:

1.Payment history – 35%

2.Credit utilization – 30%

3.The length of your credit history – 15%

4.Application for new credit – 10%

5.A mix of credit – 10%

How to have a credit score?

If you never borrowed money, owned a credit card nor applied for any loans before, then you will never have a credit score. Because you do not have any credit history, to begin with.

Your credit history is a detailed report of how many accounts that you have which includes your loans, credit cards, mortgages, inquiries, etc. This is an important key to earning a score.

Your credit history will be collected as a credit report which then determines your credit score. And if you do not have a credit history yet, we suggest that you apply for a loan or get a credit card to start.

Your credit score is ever-changing because it is being updated every month. Whenever you miss a payment, it will affect your credit score negatively. And if you make a payment or increase your credit limit, it will affect your score in a positive manner.

Remember, the largest part of your score is your payment history. You really want to make sure you do not miss a payment each month.

When should I get a credit card?

Getting a credit card as soon as possible and building your score from then will actually help you a lot in the future. Starting your credit early is actually recommended because the length of your credit history is going to be beneficial for you in the years to come.

You see, 15% of your credit score is the average age of your account or the length of your credit history. The older your account is, the better because this will show the banks that you are using your credit for a long time and that you are consistent.

Can I apply for another card if I already have one?

Why not?! That is actually recommended as well because if you have more cards, you will have more credit to responsibly utilize which will then help increase your credit score.

But you need to also know that whenever you apply for a new credit card, it will appear on your report as an inquiry specifically, a hard inquiry. Also, your score will lower by a few points temporarily but this will not hurt your credit score as much because you will have time to rebuild it with your new credit.

How to maintain a good credit score?

There are several ways to keep your credit score high and that is keeping your expenses minimal. Remember that 30% of your score is credit utilization. This means that the more amount that you spent, the more it drags your score down.

What you can do is use your credit responsibly. Keep your expenses minimal so that your utilization rate is also low. Your goal should be to maintain a balance of 10-20 percent of your entire credit limit.

This way, you can easily pay off your credit at the end of the month and maintain a good credit score. Speaking of paying your credit, another big thing is making on-time payments.

Again, the biggest part of your credit score is your payment history so you really don’t want to miss a payment or else, you know what will happen -negative effect. Be fully aware of your credit activities and seek help if needed.

We are here for you! Do you want to learn more about credit score definition and other stuff about credit score? Explore our blog now!

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