Embarking on a journey to understand credit scores? Let's demystify this financial term that holds significant sway over your borrowing capabilities. We'll delve into its meaning, importance, and the factors that influence it, empowering you to navigate your financial future with confidence.
Credit scores range between 300 and 850
The higher your score, the better your chances of getting approved by lenders
- Your ability to get credit boils down to your capacity to repay
- If your credit score indicates you’re well equipped to repay, lenders may offer you a lower interest rate, and you’ll pay less for borrowing, the opposite is also true
- Although the most widely used credit scoring model is the FICO score, there are also other types of scoring systems
- There are three versions of every score based on information gathered by the major credit reporting agencies: Experian, Equifax, and TransUnion
- Credit utilization is the percentage of available credit that you’re currently using
- It is not the same as your credit report
Factors That Affect Your Credit Score
Negative items on your report
- Late payments
- High credit utilization
- Credit inquiries
- Bankruptcies, foreclosures, late payments, etc.
- Repairing your credit is possible, but it will take time.
Factors That Make Up Your Credit Score
Late payments and credit utilization are the biggest factors used to determine your credit score.
- If you are using more than 30% of your available credit, scoring models will consider you unreliable. As a result, any utilization that exceeds 30% will hurt your score.
- Other factors that make up your score include: credit history, recently-opened credit accounts, credit mix, and recent inquiries on recent activity.
Difference Between Credit Scores and Credit Reports
Your credit report documents your credit history and the current status of your accounts and payments
- It is the source of your credit score
- The information contained in your credit report determines your creditworthiness and, consequently, your score, and is how lenders get an idea of how likely you are to repay your loans
