According to a recent survey, a lot of adult Americans have no idea what their credit score is. As many as 23 percent of millennial Americans don’t know this critical number. Even more shocking is that 54 percent of Gen Z Americans, approximately 24 million of whom will be legal adults by November, have no idea either.
Knowing your credit score is the basic requirement of improving it and staying out of fiscal difficulty. So take a break from refreshing your social media feed and learn about what a credit score, how it’s calculated, and what it’s good for.
What is a Credit Score?
Basically, a credit score tells financial institutions and companies your trustworthiness when it comes to paying back the money. This number ranges from between 300 to 850, with higher numbers being more favorable. A great credit score will get you optimal mortgage rates and amazing interest on your loans.
Companies calculate your credit score by reviewing your credit history, the catalog of loan payments, the amount of debt, and how many accounts you have. The Fair Isaac Corporation or FICO invented the most common method of calculating your credit score. So how does this system analyze your credit?
What are the Factors of Your Credit Score?
The FICO system analyzes five significant factors when calculating your credit score. These factors are as follows:
- What kinds of credit you have? The system looks for diversity in your credit history, such as having a mix of home loans, credit cards, and auto loans. Having a diverse credit history tells people you can manage your finances.
- How long is your credit history? As a record of how reliable you are when it comes to payment, the longer your credit history, the more trustworthy you appear to the system.
- Do you have new credit? This factor checks how many accounts you’ve recently applied for and if these new accounts result in the institution checking your credit. Shorter credit history can mean an unproven client and have less information to work on.
- How much do you owe in total? Aside from compiling how much you owe to various companies and banks, this number also includes how much of your credit is available to you. This secondary number is known as your credit utilization rate.
- What’s your payment history? This is the most critical factor because it explores if you can manage to pay for your debts on time. Failure to pay on time, letting interest accrue, and how much of your salary goes to paying debts are all part of this factor.
What’s a Good Credit Score?
Now that you know what they look at, how can you decipher the result? In a standard FICO scale, there are five score ranges.
- Poor scores range between 300 and 579. You’ll have difficulty securing loans with optimal interests or even being approved for one to begin with.
- Fair scores range between 580 and 669. People in this credit range are often targeted for subprime loans for both homes and cars.
- Good scores range from 670 to 739. Most people fall into this credit category and can access the gamut of loans and mortgages usually available with regular interest rates.
- Very Good scores range from 740 to 799 while Excellent scores range from 800 to 850. These are the highest credit scores available and come with perks because of the trustworthiness and reliability that goes with the number.
Determining where you fall on the credit score range is an important facet of financial responsibility. As an adult, you’ll be continuously running into situations where you have to prove you’re responsible and trustworthy. The first step to do so is to understand and identify your credit score.