Understanding Credit Scores

Credit. It’s a word that you hear everyday. In the financial world, it takes credit to get credit, and credit is crucial to buying a new home, finding a place to rent, or purchasing a new car.

Credit makes it possible to afford things that you might not have been able to afford in full at that time, but when you pay for something with credit, you are agreeing to repay that debt. Often, you’ll have to pay back more than you initially paid because of interest. Your credit score, and the specifics of a specific credit line agreement will determine how much interest you will have to pay, the size and frequency of your payments, and more.

What is a credit score?

A credit score is a number that a potential lender will use to determine whether they should lend you money, how much, and at what interest rate.

• Your credit score, also called a FICO score, is an actual number, between 300 and 850. The higher the number the better.
• These scores are what potential creditors, landlords, employers, and insurers look at as an assessment of your creditworthiness. In most cases, good credit reports and higher credit scores make it easier, and cheaper, to borrow.

What makes up a credit score?

Credit scores are the result of several different sources of data that are available in your credit report. That data falls into four distinct categories, listed in order of how much weight they usually have in impacting your score:

• Payment history
• Amounts owed
• Length of credit history
• Types of credit used

What creates a negative credit score?

There are two ways to create a bad credit score: not using credit wisely and not using credit at all.

Spending more than you can afford, not paying your bills on time, and having too much outstanding credit, often spread across multiple credit accounts increases the risk of you defaulting on repayment, which will limit your opportunities for new credit lines and decrease your credit score.

Did you know that you can have a bad credit score if you don’t use credit at all? To determine your score, there needs to be some kind of history to base it on.

What does NOT impact your credit score?

Credit scores only reflect the information related to how you use credit. There is no information about race, religion, medical history, or lifestyle. There’s also not any data related to your checking and savings accounts or your investment accounts.