Understanding Your Credit Score

Credit Score – you know it’s important and impacts your chances of getting approved for financing, but you may be wondering: “what exactly is a credit score, and is mine good?” 

To help answer these questions, we’ve developed a quick overview to provide you with a breakdown of credit score ranges, factors that make up a credit score, and ways to improve your credit score. Ready to dive in and learn more? Let’s begin! 

What is a Credit Score?:

Essentially, a credit score is a three-digit number that is used to evaluate a consumer’s creditworthiness. Credit scores can range from 300-850 where a higher number generally indicates a better credit score. 

Credit score ranges and what they mean:

Excellent: 720-850 Qualifies you for the lowest interest rates and best terms offered.
Good: 690-719 Can provide access to lower interest rates and more choices.
Fair: 630-689 Offers more options. However, you can expect to pay higher interest.
Poor: 300-629 Makes it difficult to qualify for credit, only leaving you with a few options when you need to borrow money.

Credit scores were first developed by the Fair Isaac Corporation (better known as FICO) and are based on a consumer’s credit history report which is maintained by the three national credit bureaus: Experian, Equifax, and TransUnion.

Today, FICO credit scores are the most commonly referred to. In fact, 90% of top lenders use FICO credit scores when determining a consumer’s credit eligibility. 

Factors that Contribute to Your Credit Score:

We know that credit scores can range anywhere from 300-850, but how exactly is that number determined? Although many factors come into play, below are the top five that can directly impact your credit score:

  1. Payment History: Before providing you with a loan, lenders want to be sure that you have the financial means to repay your loan and that you’ll be able to do so on time. Having a history of missed payments can negatively impact your credit score and raise a red flag for potential lenders. Which is why payment history has the most influence on your overall FICO score at 35%
  2. Credit Utilization: Another factor that plays a significant role is your credit utilization ratio. Accounting for 30% of your FICO score, this ratio examines your total available credit across all accounts and then compares it to how much debt you’re carrying. The higher your credit utilization ratio, the lower your credit score tends to be. 
  3. Credit Mix: Credit mix refers to the varying types of credit that a consumer may have within their financial portfolio. For instance, a consumer whose credit accounts include credit cards, auto loans, and a mortgage is considered to have a diverse credit mix. Although this factor plays a relatively small role—10%—it can provide lenders with insight into how you manage multiple accounts with a variety of payment types. 
  4. Hard Inquiries: If you apply for a line of credit and a lender moves into the process of checking your credit report and score, this places what’s known as a “hard inquiry” on your credit report. Unlike a “soft inquiry” which only checks your credit for pre-approval, hard inquiries are linked to an actual credit application and can last up to two years on your report. 
  5. Negative Information: This relates to any financial information on your credit report that indicates missed payments, accounts that were sent to collections, foreclosures, repossessed property, or any other financial accounts that may have been flagged. Depending on the type of account, having a negative record can stay on your credit report up to seven years. 

Why Credit Scores Matter: 

Gone are the days when you could borrow, trade, or close a business deal with a simple handshake or verbal agreement. Today, the process of borrowing money is a bit more formal, which is where credit scores come into play. 

Lenders use credit scores as a resource for determining the potential level of risk that may be associated with interested borrowers. Essentially, the higher someone’s credit score is, the lower the perceived risk in allowing that person to borrow money. 

This means that whether you’re looking to purchase a new car, take out a personal loan, obtain a mortgage, or open a credit card, a higher credit score will typically result in lenders being more willing to loan money to you with a lower interest rate.

Ways to Improve Your Credit Score: 

If you find that your credit score isn’t exactly where you’d like it to be, don’t worry! There are steps you can take to work towards raising your score. The key is to focus on these top five factors that initially impact your credit score. So, if you’re looking to raise your credit score, take these steps:

  1. Consistently pay your bills before or by their requested due date. 
  2. Lower your credit utilization ratio by paying down credit card debt.
  3. Don’t open unnecessary accounts in an attempt to try to diversify your credit mix. 
  4. Be mindful of how many credit lines or loans you apply for. Remember that, unless the lender specifically states that their application will not affect your credit score, each application could place a hard inquiry on your credit report. 
  5. Review your credit report at least once a year and dispute any inaccuracies you may find. 

Are you Ready to Apply? 

If you find yourself in need of a personal loan but concerned about your credit score rating, we might be able to help! With Credit Direct, you can feel confident knowing that we look at more than just credit scores when qualifying individuals for a loan. We also make our loan application a safe, quick, and straightforward process that won’t affect your credit score. Apply in just a few minutes to check pre-qualified personal loan offers!

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