Credit Score
A number with three digits, informing us if someone is likely to pay their bills or pay back the money they borrowed.
What Is a Credit Score?
A credit score is a number with three digits, informing us if someone is likely to pay their bills or pay back the money they borrowed.
Let’s say you are considering giving a loan to your friend Bob, who needs some money to buy his favorite new TV.
You are a little confused because you aren’t sure if Bob will give you the money back after 1 month. In this case, one of the first things you should do is look at Bob’s credit score!
For Bob’s sake, the higher the number, the better it is. A bigger number means you are more trustworthy to those letting you borrow their money. In that case, Bob will likely get the money he needs for that new TV.
Those that give you your credit score, or CS, look at your history with anything related to payments and credit. They look at your accounts and check if you have debts and how much, and they see if you are someone who usually pays on time.
Essentially, after they do the above, the number they generate will give them a good idea of how trustworthy you are when making payments.
Key Takeaways
- A credit score is a number with three digits that tells us if a person is trustworthy when making payments.
- The range of the 3-digit CS goes from 300 to 850. The bigger the number, the better your situation.
- Credit reporters look at your history with anything related to payments and credit. They look at your accounts. They check if you have debts and how much, and they see if you are someone that usually pays on time.
- Equifax and TransUnion are very popular credit companies. They do their research on you and compute your scores.
- A higher score builds trust, meaning you can pay less rent or obtain a lower interest rate.
- Your history of making payments on time and how much money you owe overall have the biggest impact on your CS.
- A good score can help you get the best credit cards with the best benefits. You will earn more benefits if you have a high CS, and your balance limit will increase, meaning more financial freedom.
How Credit Scores Work
Some of the top companies that do their research on you and compute your scores include Equifax and TransUnion. They are trustworthy and reliable, which is why they are among the most famous companies in the US.
The range of the 3-digit CS goes from 300 to 850. Since lenders always look at your credit before deciding to give you money, let’s look at what these numbers signify:
| Credit Score | What Does It Mean? |
|---|---|
| Between 800 and 850 | Near perfect |
| Between 740 and 799 | Very good |
| Between 670 and 739 | Good |
| Between 580 and 669 | Could be better, but reasonable |
| Between 300 and 579 | Not good |
If you have a near-perfect score, i.e., between 800 and 850, you have been keeping up with everything. You are generally someone who does not miss payments and pays on time.
Your comprehensive history of paying bills is extremely impressive for lenders, so borrowing money or getting a credit card will be easy for you. In addition, you will be considered a low-risk individual who can be trusted.
For those that don’t have a perfect score but whose score is “very good,” you don’t have much to worry about.
Lenders will not be worried about giving you a loan, but it is possible that you won’t be able to negotiate a price that favors you since your score can be better. An example would be negotiation interest rates. If you ask your friend Bob for a large amount, he might agree only if you pay him interest.
Bob will most likely give you the money, but it might be hard for you to lower the interest rate he is asking for. The same applies to someone that has a “good” score. Although, this person will likely pay higher interest rates.
Now, for numbers less than 670, you might find it hard to be respected. A score between 580 and 669, although reasonable, it might mean that, at times, you find it hard to pay your payments on time, and lenders will notice that.
Lastly, a “not good score” is a bad score! You can be someone that pays bills late and does not return the money borrowed from someone on time.
There’s a good chance you will be considered a high-risk candidate, meaning you will struggle to find people willing to lend you money.
What factors impact my credit score?
Your CS can be affected in several different ways. Let’s discuss some of these factors below.
1. History of making payments
How often do you pay? Are you missing any payments? What is your balance?
These are a few questions you should ask yourself if you are wondering about your CS and worried about possible changes.
Interestingly enough, FICO, the most popular in giving consumers credit scores, makes it clear that your overall history of making payments has the largest effect on your CS.
It is because it is a good indicator of whether you are reliable and can be trusted to make payments on time.
Note
A scenario where you feel forced to file for bankruptcy can severely affect your CS.
As you can see, there is a common pattern concerning your score. That pattern is trust. When calculating the CS, anything that can cause a company or a person to lose trust in you is a huge factor.
2. Age of your credit accounts
The age of your credit accounts also affects your credit score.
Usually, the bigger the age, the better. This is mainly because companies consider a bigger age more trustworthy and less risky.
Why? Because your sample size is bigger, you have more to show. Evidence of payments brings more credibility to a person or company considering lending you money.
It is well known that around 15% of your CS is based on the age of your credit accounts.
3. Accounts variety
Having more than one credit account can positively change your CS.
Many people have two different accounts. For example, one account focuses on your car or house loans. The other account is for all of your credit lines.
If you can prove to anyone you are borrowing money from that you have the capability to manage different accounts that you own, this can positively help your credit number.
4. Money you owe
How much money you owe is the second strongest shifter for your CS.
After all, if you borrow $350 from Person X, you will owe Person X $350 sometime in the future, assuming you did not agree to pay interest.
For Person X to even consider lending you his hard-earned money, it would be smart of them to check how much money you owe to others.
It can give them an idea of the type of person you are in terms of the trust. Chances are, if you owe many people money, you also struggle to pay the money back to people, or you are currently not in a stage where you can return what you borrowed.
Note
Roughly 30% of your CS is determined by the amount of money you owe others.
Why is Having a Good Credit Score So Important?
A good credit score can do wonders for you.
You open up more opportunities financially if you have a good credit number. We all want to achieve big things financially, but it is hard to do so with a low CS. We might experience circumstances in life where we are forced to borrow money. Unfortunately, a bad credit number can limit your chances of doing so.
Another smaller scenario is, let’s say, you are buying a phone. You find it hard to make the full payment now, so you decide to pay a deposit to collect the phone.
What does it mean to have a low credit score? It means you are not very trusted. In this case, you will be asked to pay a bigger deposit to earn your phone.
The same applies to more serious scenarios such as renting a house. You will be asked to pay a higher deposit than your friend, who also wants the apartment but has a higher CS.
Your friend will also have a higher chance of getting a decrease in his rent since he is more capable of paying his bills.
This credit score shows how trustworthy you are with your credit payments. This is why, as mentioned above, lenders look at your history of making payments and how much money you owe.
Most people will have to borrow money to achieve their ultimate career goals. Well, it’s going to be hard for a lender to give you his money and for a decent interest rate.
Getting a loan would be easy if you had a good credit number. Not only that, but you will probably be asked to pay only a small interest fee.
This means more money to save for your future! Hence opening up more opportunities for you and options to spend money on or invest in.
The reason for getting a low-interest rate requirement is that you are trusted and likely to pay what he owes on time. As a result, there will be more willingness to give you money.
If Bob and Joe receive a $10,000 loan from company X to kickstart their businesses, but Joe has to pay a 7% interest rate instead of 4% like Bob, then Bob will have more money saved up to buy quality assets to improve his business.
Can you see the importance of a good CS now? It can speed up and slow down the process of creating a successful business.
In addition, everyone wants to get the best credit cards with the best benefits. You will earn more benefits if you have a high CS, and your balance limit will increase, thus giving you more financial stability and freedom.
How to Improve Your Credit Score
If you are not happy with your score, don't worry! You can always work to improve it.
It is much easier to lower your CS number than to increase it, but with some consistency, you can develop a pattern of good actions which can impress lenders and credit reporters.
Below are some ways to do so:
1. No late payments
Simply do not pay your bills late. Have a long history of paying money that you owe on time, as a large sample size of on-time payments can do you wonders.
Remember, consistency is key. One late payment can negatively affect your CS. This means you must consistently make your payments on time if you want to see any growth in your score.
2. Buy what you can afford only
Don’t exceed your budget! This will leave you with less money to work with and hence less money to give back to lenders or spend on your future.
All of this negatively affects your CS. Proper budgeting and being cautious can single-handedly improve your credit number. This will bring you more financial freedom and stability on a macro level.
3. Consistently check your credit reports
Checking your credit reports frequently is a good way to find out if there are any errors.
Those errors can harm your score, so it is important to detect them early if you can. This shouldn’t be a hassle as you can obtain a free report to check this information.
Your report can also help you identify where things are going wrong and what areas you can approve.
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