A credit score is a numerical representation of a person’s creditworthiness, which is used by lenders and financial institutions to assess the risk of lending money or extending credit to an individual. It provides a quick and standardized way for lenders to evaluate the likelihood that a borrower will repay their debts on time.
Credit scores are typically calculated based on information found in a person’s credit report, which includes details about their credit history, such as:
- Payment history: This includes information on whether you’ve made your credit card payments, loan payments, and other financial obligations on time. Late or missed payments can negatively impact your credit score.
- Credit utilization: This refers to the amount of credit you’re currently using compared to your total available credit. High credit card balances relative to your credit limits can lower your credit score.
- Length of credit history: The length of time you’ve had credit accounts can influence your credit score. A longer credit history can be viewed more positively, assuming it’s been managed responsibly.
- Types of credit: Having a mix of different types of credit accounts, such as credit cards, installment loans, and mortgages, can have a positive impact on your credit score, as it demonstrates your ability to manage various financial responsibilities.
- New credit inquiries: Whenever you apply for new credit, a hard inquiry is usually made on your credit report. Multiple recent inquiries can have a negative impact on your credit score, as it may suggest you’re taking on too much debt at once.
The most commonly used credit scoring models in the United States are FICO® scores and VantageScore®. These scores typically range from 300 to 850, with higher scores indicating better creditworthiness. A higher credit score makes it easier to qualify for loans, credit cards, and other forms of credit, often with better interest rates and terms. Conversely, a lower credit score may result in limited access to credit or higher borrowing costs.
It’s important to monitor your credit score regularly and take steps to maintain or improve it, as a good credit score can have a significant impact on your financial well-being and your ability to achieve your financial goals.