If you’ve ever seen the three digit number that is talked about on credit commercials and websites, you’ve seen a credit score. But what is a credit score? If you’ve wondered what that number really means, if you’ve ever said to yourself, what is my credit score anyway? Your questions are about to be answered. Read on to learn all about the credit score and what it means for you.
A credit score is a numerical representation of your credit risk. The score has been calibrated to the likelihood a person will default on a loan. A specific percentage of people in each score range will default, or not pay back the loan. Therefore, when a lender looks at your score, what they are really looking at is the percentage of the time that someone in your position credit-wise defaults on the loan they are considering extending to you.
The credit score is determined by the information in your credit report. The exact formula is a secret, but it is all based on the different parts of your credit picture. The largest impact comes from these categories: Payment History, Amounts Owed; Length of Credit History; New Credit; and Types of Credit Used. Since the three major credit bureaus may have slightly different information in their reports, you may have three somewhat different scores.
You should always be looking to optimize your credit score. The scores range from 400 to around 900, with a higher number representing a smaller credit risk to the lender. If your score is 740 or above, you are in good shape to get the loan you want at the best rates. If it’s around 700 or above, you can still get a competitively priced loan. Below that things start to get more complicated and expensive. Under 620 puts you in a high risk category and you will struggle to get a loan, for which terms will be unfavorable and costly.
The way to boost your credit score is to show lenders that you are a good credit risk. You do this by paying your bills on time every month, not defaulting on any loans, and not taking out too much credit relative to your income. The only way to know exactly the right way to boost your credit score is to view it. Look at your credit report and see what’s being reported about you. Learn where you stand, so you can understand where you need to be. Work to identify aspects in which you can improve. Your credit score is multifaceted so there is always room for improvement. CreditScore.com provides free scores, so you get the information you need.