Between figuring out what constitutes good and bad credit, determining what affects one’s credit score, and understanding why it’s important to maintain favorable credit, it’s no wonder why so many consumers ignore their credit scores. However, ignorance has never been a good excuse, and there’s no exception when it comes to learning about credit scores either.
What is a Credit Score?
Everyone should expect a three digit score, which generally ranges between 300 and 850. In most cases, the closer the number is to 850, the better the credit score.
If one’s credit score is above 720, the score is considered in excellent shape, and it’s still in good standing if it falls anywhere between 680 and 719. Scores ranging between 620 and 719 are average.
It’s a good idea to strive to keep a credit score above 619, as average, good, and excellent credit scores offer the best benefits, such as low interest rates and fees on certain services.
It’s when the score drops below 619 that a consumer may start running into issues, as scores below 619 reflect poor and bad credit. In this case, those with low credit scores sometimes resort to unsecured personal loans when they need to borrow money, because traditional lenders may not trust them to make timely payments.
What Factors into a Credit Score?
There are numerous credit score calculating methods out there, but the FICO formula is one of the most popular. To arrive at consumers’ three digit scores, the FICO scoring method factors in around 35% of their payment history, 30% of their outstanding debt, 15% of the length of their credit, 10% of their newest credit, and about 10% of the kinds of credit they carry.
Why Do Credit Score Numbers Vary?
The top credit bureaus, Equifax, TransUnion, and Experian use the same FICO scoring method to calculate scores, however, a consumer may receive various numbers because the bureaus may have differing information on file.
For example, one credit card company may only report a consumer’s credit history to Equifax, while the consumer’s other two credit card companies send into TransUnion. Therefore, TransUnion and Equifax will arrive at different numbers because of their different variables.
Why Good Credit?
A credit score is an indicator of one’s payment reputation. When a consumer decides to apply for a car loan, sign up for a cell phone plan, or even rent a house, these service providers will want to know if the consumer can pay on time. So the service providers will gauge whether the consumer will make timely payments based on the results of the credit report.
If one has a good credit score, there shouldn’t be any problems receiving service. On the other hand, if the consumer has poor credit, they may hike up the interest rates and charges, and maybe even require that the consumer pay an extra security deposit. In other cases, they may refuse the consumer altogether for fear of missed payments.