We’ve all heard the term thrown around, but what exactly is a credit score? It seems like a random number assigned to you by the universe. Some adults have a “good” score while others have a “bad” score. Regardless of its ambiguity now, however, it is a significant number that can affect your finances as you begin your journey into adulthood. Read more on credit scores below!
Q: What is a credit score?
A credit score is a number that represents your “creditworthiness”. The number signals to lenders whether they should let you borrow money or not. It can also determine what interest rate lenders choose to charge you. The higher your credit score, the more lending opportunities you’ll have.
A credit score ranges from 300 to 850. Typically, a “very poor,” score is one between 300 and 579, a “fair,” score is one between 580 and 669, a “good,” score is between 670 and 739, a “very good,” score is between 740 and 799, and an “exceptional,” score is between 800 and 850.
Q: How do I get a credit score?
Your credit score is determined by a mixture of factors, each with varying significance. There are 5 main factors that determine your score:
- Payment History – Payment history refers to the record you have of paying other debts on time or not. The more you pay your bills when they’re due, the better this portion of your score will be.
- Amounts Owed – This doesn’t necessarily regard your overall debt, but the rate at which you use your credit. Lenders want to see that you don’t use large portions of their loan all at the same time. For example, if a credit card gives you $1000, they don’t want to see you using $800 of it.
- Length of Credit History – Length of credit history refers to how long you have been borrowing money from lenders. Typically, the longer you’ve been borrowing money, the better your score will get. This portion of your score will get better as you grow older!
- Credit Mix – This refers to the type of debts you have. There are different kinds of loans such as student loans, car loans, home loans, credit cards and retail accounts. Your credit score typically increases when there is variety in your loans. This does not mean that you must have all kinds of loans for a good score, but it signals how you’re choosing to spend your money.
- New Credit – This refers to how often you’re asking lenders to borrow money. Lenders do not want to see that you are constantly asking for loans. Usually, you should wait at least six months between opening loans. For example, if you took out a credit card with your bank in January, it is best to wait until June until you go to an Electronics store for a card.
For some people, some factors weigh more than others. For example, the first time you take out a loan, your credit score might be more dependent on the amount you owe rather than your payment history since you don’t have a “history,” just yet.
Q: Why is a credit score important?
A credit score can determine whether you get a loan or not, and what interest rate you have to pay your loans back at. Say that you want to get a car in the near future but don’t have all the money to buy it from a car dealership. You decide to buy the car with credit but the car dealership rejects you the loan because of your “bad” credit score. It may work the same for when you want to buy a home, or even finance an expensive cell phone.
Additionally, a credit score can be viewed by certain actors who you give permission to. For example, when you are applying for an apartment, the landlord may want to know your credit score. For the landlord, this might determine whether you’ll pay your rent on time or not. If your credit score is “bad,” they can reject you.
Overall, the score has a significant impact in the world of finance.
Q: Who gets a credit score?
Anyone in the United States is given a credit score determined by a set of identifying factors. Although social security number is a common identifier for lenders, they can also use your address, birth date, phone number, and more to determine who you are. In other words, you do not have to be documented to receive a credit score.
Q: When do I get a credit score?
Your credit score starts when you open your first lending account. If you have any student loans, you already have a credit score, even if you’ve been unaware of it.