What are Credit Scores?

Did you know that only one-third of Americans have checked their credit scores in the past year?

Not many people stay up-to-date on their credit scores, but they should. Your credit score impacts so many parts of your financial life, including your ability to take out loans, get approved for a mortgage, and other crucial purchases.

But what are credit scores, and how do you know whether yours is a good one? How do good credit scores and bad credit scores affect your borrowing ability?

Read on to learn more about what credit scores are, how they are determined, and what this means for you.

What Are Credit Scores?

When you’re learning about credit, the first question to ask is, “What is a credit score?”

Credit scores are numbers assigned to borrowers that show how trustworthy of an investment they are to potential lenders. Credit scores were invented in 1989 in an attempt to create an unbiased system for lenders to use to evaluate a potential borrower’s creditworthiness.

Credit scores can be anywhere from 300 to 850. While different credit score ranges mean different things, a higher number generally means that a borrower is a more sound financial investment for a potential lender than a borrower with a lower number.

How Are They Determined?

Your credit score is determined by credit reporting agencies based on several different factors. Your score may vary slightly from agency to agency, but they generally use the same criteria to determine your credit score.

First, they look at your payment history and the amount of debt you currently hold. If you regularly make payments on time and maintain a low credit utilization ratio, your score will be higher than if you did not do these things.

These first two factors make up the majority of your credit score. However, credit reporting agencies will also look at the length of your credit history, the kinds of credit you hold, and whether you’ve taken out any new lines of credit recently. Having a long borrowing history will make you a more secure financial investment for a potential lender.

All of your various kinds of credit can impact your score, including student loans, mortgages, car loans, credit cards, and others. Having a mixture of these kinds of credit will raise your credit score. Making regular payments on your loans and lines of credit will also contribute to credit score improvement.

What is a Good Credit Score?

All credit scores above 700 are considered good credit scores, and an 800 credit score or higher is excellent.

If you have a good or an excellent credit score, you may qualify for lower interest rates or for larger amounts of credit.

If you have a credit score lower than 700, it doesn’t mean that you won’t be able to open up new lines of credit. However, you may be charged higher interest rates or given a lower credit limit on your credit card.

Get Your Finances Under Control

Now you know the answer to the question, “What are credit scores?” Use this information to inform your purchasing decisions and boost your credit score.

Looking for more advice on sorting out your personal finances? Check out the other articles in our Finance section.

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