Credit Score: Calculation, Ranges, Check, Improve

A credit score is a numerical representation of an individual’s creditworthiness, calculated using various financial data. It ranges typically from 300 to 850, with higher scores indicating better credit risk.

Credit scores are primarily calculated by three major credit bureaus: Experian, TransUnion, and Equifax. These bureaus collect information on your payment history, types of credit, and other financial behaviors to generate your score. FICO is commonly used model for calculating credit scores and is recognized for its accuracy.

Many people are unaware that they can check their credit score for free once a year from each of the three major bureaus. Understanding your credit score is essential for financial planning and for securing loans or credit at favorable interest rates.

The score is recalculated periodically, so it’s beneficial to keep an eye on it and take steps to improve it if necessary.

Contents

1 How Is Your Credit Score Determined?
2 How Are Credit Scores Calculated?
3 What Should a Good Credit Score Be Like?
4 How can I check my credit score?
5 How to Increase your Credit Score?
6 How Long Does it Take to Increase a Credit Score?
7 Who Can Access Your Credit Score?
8 Why Does a Credit Score Decrease?
9 What Should Your Credit Score Be to Use a Credit?
10 How do I get a free copy of my credit reports?
11 Do personal loan applications check your credit score?
12 Do installment loan applications check your credit score?
13 Do bad credit loan applications check your credit score?
14 Do payday loan applications check your credit score?
15 Can You Apply for Credit When Your Credit Score is Low?
16 Which Lenders Provides Personal loans with Bad credit?
17 More on credit scores and credit reporting

How Is Your Credit Score Determined?

Your credit score is a numerical representation of your creditworthiness, calculated based on five key factors: payment history (35%), credit utilization (30%), length of credit history (15%), types of credit in use (10%), and new credit (10%).

A strong payment history and low credit utilization rate are crucial for a high score. The longer your credit history and the more diverse your types of credit, the better. Lastly, frequent credit inquiries can negatively impact your score. Understanding these factors can help you improve your financial standing.

How Are Credit Scores Calculated?

Understanding how credit scores are calculated can be a complex task. However, it’s crucial to grasp this concept as it plays a significant role in your financial life.

Two key factors that influence your credit score are your payment history and the amounts you owe. These factors account for up to 70% of your overall credit score. Let’s delve deeper into these aspects to understand how they impact your credit score.

How Does Payment History Affect Your Credit Score?

Payment history is the most crucial part of any credit score, accounting for up to 40% of your overall rating. It reflects your reliability as a borrower and indicates whether you have been consistent with your payments.

The factors considered in your payment history include:

The number of loan and credit accounts that you have always paid on time.
The number of accounts for which you are currently at least 30 days behind on payment.
Whether or not you have gone bankrupt, had past due accounts sent to collections, or fallen at least 30 days behind on a loan or line of credit. The recency of these items will also factor in.
How many days past due you are on delinquent accounts.
The dollar amount past due you are on delinquent accounts and/or accounts sent to collections.

Failing to make payments as agreed on certain types of accounts will negatively impact your credit score. Therefore, it’s essential to make timely payments and avoid delinquencies to maintain a good credit score.

How Do Amounts Owed Influence Your Credit Score?

The money you owe lenders accounts for at least 30% of your score. This factor is an indicator of whether your spending habits are sustainable and if you’re likely to face serious financial problems in the future.

The part of your credit score based on the amounts owed is determined by the following factors:

The number of accounts you carry a balance on.
Your credit utilization ratio, which is the percentage of your available credit that you’re using.
How much you currently owe on credit cards and installment loans.

In a FICO® Score☉ or score by VantageScore, it is commonly recommended to keep your total credit utilization rate below 30%
According to Experian

Lower is better with each of these data points. For instance, a lower credit utilization ratio indicates that you’re not overly reliant on credit, which positively impacts your credit score. Similarly, owing less money on credit cards and installment loans suggests that you’re managing your debts effectively.

VantageScore, a popular credit scoring model, has separate categories for balances, available credit, and utilization. This model emphasizes the importance of managing your credit effectively and maintaining a balance between your credit usage and available credit.

In conclusion, understanding how credit scores are calculated can help you make informed financial decisions. By focusing on maintaining a good payment history and managing the amounts you owe, you can work towards improving your credit score.

Length of Credit History

The length of your credit history is another crucial factor in determining your credit score, and makes up 15% of your credit score. This refers to how long you’ve been using loans and lines of credit. A good credit score based on years of information has a better chance of accurately forecasting a borrower’s risk than a good score based on a month or two of information.

Years of positive information also make the occasional mistake less damaging. Credit scores generally use the age of the oldest open account on your credit report or the average age of your open accounts. Therefore, maintaining long-standing credit accounts can contribute positively to your credit score.

Types of Credit Used (credit mix)

The types of credit you use play a significant role in the calculation of your credit score and makes up 10% of your credit score. This category measures how many different types of credit accounts you’ve used and how recently you’ve used them. Some common types of accounts include credit cards, personal loans, retail lines of credit, auto loans, and mortgages.

In general, the types of credit you’ve used show how well-rounded of a borrower you are. For instance, if you’ve successfully managed a variety of credit types – from credit cards to auto loans – it indicates to potential lenders that you’re capable of handling different types of credit responsibly.

New and Recent Credit

Credit-scoring companies use the category of new and recent credit to emphasize recent financial performance. New credit makes up 10% of your credit score. This section includes how many loans and lines of credit you’ve opened in recent months as well as how that number compares to the total number of accounts in your credit history.

It also takes into account how long it’s been since you opened your newest accounts, the number of hard inquiries (i.e., how many times you’ve applied for credit) made into your credit history in the last 12 months, and how long it’s been since your last credit inquiry.

Creditors want to know whether you’re desperate for additional credit, which is a red flag for a high-risk borrower. Therefore, it’s important to apply for new credit sparingly and only when necessary to maintain a healthy credit score.

What Should a Good Credit Score Be Like?

Credit scores in the US range from 300 to 850, with higher scores indicating lower lender risk. According to Experian, a major credit reporting agency, a score between 670 and 739 is good and 740 to 799 is very good.

However, an 800 score is exceptional and may offer borrowers the best terms and rates.

FICO, another credit scoring giant, says the median US score is 711. Please note that these ranges may vary by lender and credit type.

Good credit opens many financial doors. High credit scores can help you get the best loan rates and insurance rates. Understanding what makes a good credit score and working to achieve or maintain it is crucial for financial well-being.

How can I check my credit score?

There are several ways to obtain a credit score.

Firstly, financial institutions often provide free credit score checks for customers. These are typically available on a monthly basis and are often accompanied by credit reports.
Secondly, many credit card issuers offer free credit scores as part of their customer services, making it easy for cardholders to monitor their credit standing.
Alternatively, there are several online platforms that offer free credit score checks. Companies like Credit Karma, Credit Sesame, and Quizzle provide free credit scores, as well as credit reports and monitoring services. It’s important to note that these platforms use the VantageScore model, which slightly differs from the FICO model used by most lenders.

Lastly, annualcreditreport.com, a site sponsored by the three major credit bureaus: Experian, Equifax, and TransUnion, provides free annual credit reports. However, this service does not include a credit score, but it allows individuals to review their credit history for any discrepancies or fraud.

In conclusion, checking a credit score is a straightforward process with many accessible options. Regular checks will enable individuals to understand their financial health better and take proactive steps towards maintaining or improving their credit standing.

How to Increase your Credit Score?

Now that the importance of credit score and ways to check it have been established, the focus can now shift to understanding how to increase it.

A Robust Credit Score: A robust credit score is instrumental in attaining favorable terms when seeking credit. Consequently, a clear understanding of how to increase it is crucial.
On-time Payment of Debts: Many strategies can be employed to this end. On-time payment of debts happens to be one of the most fundamental. According to data from the Fair Isaac Corporation, payment history accounts for approximately 35% of the FICO score, which is widely used by lenders.
Low Credit Utilization Ratio: Another vital strategy is maintaining a low credit utilization ratio, which is the percentage of available credit that one is using. A lower ratio is preferred as it indicates that one isn’t heavily reliant on credit. This accounts for nearly 30% of the FICO score.
Keep Old Credit Accounts Open: Furthermore, keeping old credit accounts open, even if not in use, can also contribute to a better credit score. These accounts increase the average age of the credit history, which forms about 15% of the FICO score.
Monitor Credit Reports: Lastly, monitoring credit reports regularly for any errors and disputing them can help in maintaining a correct and favorable credit score. The combination of these strategies can significantly improve the credit score over time.

How Long Does it Take to Increase a Credit Score?

The time it takes to raise a credit score depends on many factors. Credit score, history, frequency of credit use, and bill payment promptness are examples.

According to VantageScore, most minor changes, like paying bills on time, take one to two months to affect one’s credit score. However, major changes like paying off debt or recovering from bankruptcy can take two to ten years.

The Federal Trade Commission reports that most people’s credit scores improve within a year of corrective actions. Consistency and longevity of good financial habits are stressed.

Over time, keeping credit card balances low and paying bills on time can boost credit scores. Reducing debt and avoiding new debt can also speed things up.

Conclusion, responsible financial behavior can speed up credit score improvement, which takes time.

Who Can Access Your Credit Score?

Credit scores are confidential under the Fair Credit Reporting Act (FCRA). Data access is restricted to legitimate business entities. Credit card issuers, mortgage lenders, auto lenders, and other businesses that assess customer credit risk are examples.

Landlords and employers can request credit scores, but they must get written permission from the scoreholder. This rule keeps personal financial data in the hands of individuals.

Credit card issuers and lenders need credit score access to approve or deny applications. Landlords can use credit scores to assess tenants’ payment reliability. Jobs requiring financial responsibility or security clearances may require a credit check.

Individuals can also view their credit reports and scores under the FCRA. Monitoring credit health and correcting errors requires this. Overall, credit scores are private but available under certain conditions.

Why Does a Credit Score Decrease?

After discussing who can access credit scores, it’s important to discuss what can lower them. A credit score drop often prompts questions about its causes.

Late or No Credit Payments: Late or no credit payments are common reasons for credit score declines. The Consumer Financial Protection Bureau says one late payment can lower a credit score by 100 points.
High Credit Utilization: High credit utilization can also hurt credit scores. To avoid credit score damage, keep credit utilization below 30%.
Hard Inquiries: An increase in hard inquiries on a credit report can lower credit scores. Each hard inquiry can lower a credit score by 5 points, says Experian. Too many credit applications in a short time can indicate financial distress to creditors, lowering credit scores.
Closing Old Credit Accounts: Closing old credit accounts, especially those with a good payment history, can also hurt credit history length, which accounts for 15% of a FICO credit score, according to MyFICO. For a long credit history, keep old credit accounts open.
Bankruptcies and Tax Liens: Finally, bankruptcies and tax liens lower credit scores.

What Should Your Credit Score Be to Use a Credit?

Having explored the various factors that could potentially lower a credit score, the question now arises: what should your credit score be to borrow money?

A credit score is a pivotal factor in determining eligibility for loans and credit lines. Most lenders prefer borrowers with a credit score of 670 or higher, as it signifies less risk. According to a report from Experian, one of the three major credit bureaus in the U.S., a score above 800 is viewed as exceptional, while a score between 740 and 799 is deemed very good. A score between 670 and 739 is considered good, and a score between 580 and 669 is fair. However, scores below 580 are generally seen as poor, and obtaining a loan with such a score could prove challenging.

It’s worth noting that these numbers are not set in stone, and different lenders may have varying criteria. For instance, some may be willing to lend to borrowers with lower credit scores, but with higher interest rates or more stringent loan terms. Therefore, maintaining a high credit score is critical, as it not only increases the likelihood of securing a loan but also ensures favorable loan terms. This underlines the importance of regularly checking and working towards improving one’s credit score.

How do I get a free copy of my credit reports?

Understanding your credit report is crucial for financial well-being. A credit report contains information about your credit history and behavior, which lenders, employers, and others may use to evaluate your creditworthiness. Here’s how you can obtain a free copy of your credit reports.

The Right to Free Reports

You have the legal right to request one free copy of your credit report each year from each of the three major consumer reporting companies — Equifax, Experian, and TransUnion.

How to Request Your Report

You can request your free credit report through various methods:

Online: Visit AnnualCreditReport.com
Phone: Call (877) 322-8228
Mail: Download and complete the Annual Credit Report Request form and mail it to the specified address.

Monitor your credit report

By requesting reports separately, for example, one every four months from each agency, you can monitor your credit throughout the year. If you need additional reports, a credit reporting company can charge no more than $14.50 for a credit report.

Do personal loan applications check your credit score?

Yes, when you apply for a personal loan, the lender will typically check your credit score. This is one of the key factors they use to determine whether or not to approve your loan application. Sometimes payday loans can refer to quick loans also.

If you have a high credit score, it indicates that you’ve managed your credit well in the past, making you a lower risk to the lender. On the other hand, a low credit score might make it more difficult for you to get approved for a personal loan. In some cases, lenders might still approve applicants with low scores, but they may charge higher interest rates to offset the increased risk.

Do installment loan applications check your credit score?

Yes, installment loan applications typically involve a credit check. The lenders use this process to determine your creditworthiness, which is an assessment of your ability to repay the loan. A good credit score signifies responsible credit management, making you a lower risk to lenders. However, a low score may pose challenges in loan approval.

Do bad credit loan applications check your credit score?

Yes, even bad credit loan applications usually involve a credit check. Lenders use this process to ascertain your ability to repay the loan. While a low credit score may make securing a loan more challenging, some lenders are willing to provide loans to individuals with poor credit, often at higher interest rates.

Do payday loan applications check your credit score?

Since most payday lenders don’t run credit checks, payday loan applications usually don’t show up on credit reports and therefore they don’t check your credit score.

Keep in mind that the interest rates will likely be higher, and you may need to provide collateral or a co-signer. Always read the terms carefully and consider the long-term impact on your financial health.

Can You Apply for Credit When Your Credit Score is Low?

Yes, you can apply for credit even with a low credit score, but your options may be limited. Traditional lenders like banks are less likely to approve your application. However, there are specialized financial institutions that cater to individuals with low credit scores.

Which Lenders Provides Personal loans with Bad credit?

When your credit score is low, traditional banks may not be the best option for obtaining a personal loan. Instead, you might consider alternative lenders like online lenders or peer-to-peer platforms. These institutions are often more flexible in their lending criteria.

However, they usually charge higher interest rates to offset the risk. It’s crucial to compare different lenders and their terms to find the most suitable option for your financial situation.