What is a credit score?
Are you looking to improve your credit score but not sure where to begin? Credit scores are a cornerstone of many financial decisions, so it's important to understand what goes into them. We'll provide an overview of what credit scores are and how they're calculated—so you can start taking steps towards improving yours today.
What is a credit score?
Your credit score is a number that reflects how credit worthy you are based on a set of pre-determined factors. Credit scores range from 300-850 and are compiled from information found in your credit report.
The most commonly used credit score is the FICO (Fair Isaac Corporation) credit score. It is used to determine your credit eligibility and interest rate. The FICO algorithm has evolved over time and different companies use slightly different variations, but the principal remains the same. If someone lets you borrow $5, how likely are you to pay them back on time?
What makes up my credit score?
- Payment history. This section shows your ability and willingness to pay your bills on time and accounts for 35% of your credit score.
- Amount owed. Your credit usage makes up 30% of your credit score and shows how you use the credit you have available by taking the amount you owe compared to the total amount of credit available to you.
- Length of credit history. This sections accounts for 15% of your credit score and shows the amount of time you have been borrowing money.
- Types of credit. This part of your credit report demonstrates your ability to manage different types of debt like installment loans, mortgage loans, and credit cards and makes up 10% of your score.
- Frequency of new credit. This section looks at how often you open new credit accounts and makes up 10% of your credit score.
Why does my credit score matter?
Your credit score is important because it determines how much it will cost you to borrow money, in the form of your interest rate. If your score shows a strong history of repaying your debts, you are a lower risk, meaning you would qualify for a lower interest rate which saves you money over time.
What should I do next?
Stay tuned for more information about credit scores! As we continue with this mini-series, we will cover each section in greater detail and discuss ways to improve your score.