A credit score is a number that depicts your creditworthiness and usually ranges between 300–850. The higher your score, the better your chances of getting approved for loans by potential lenders.
This score is calculated based on several factors like your number of open accounts, your debt level, repayment history, and other factors.
How Do Credit Scores Work?
Your credit score can have a significant impact on your financial life. The score range you fall in plays a huge role in deciding if you are eligible for a loan or other form of credit.
While creditors have their own defined ranges for credit scores, the FICO score range they base their decisions on are:
Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579
If your credit score is poor or fair (300-580), you might be considered to be a subprime borrower and may not get the kind of loan offers you were hoping to secure. To compensate for your risky credit, lenders may charge you a higher interest rate, shorter repayment term, or might need you to get a co-signer.
Factors Considered While Calculating Your Credit Score
Experian, Equifax, and Transunion are the three major credit reporting agencies in the country. They report, update, and store consumers’ credit histories. Each of these credit bureaus looks at five factors while calculating credit scores and evaluating profiles:
Total amount owed
Length of credit history
Types of credit
How to Maintain a Healthy Credit Score
Credit bureaus keep tracking and updating a borrower’s credit report. New information can cause the credit score to rise or fall. It is important to keep your credit healthy even after you’ve been successful in getting a loan. Here are three ways for you to maintain your credit score, or improve it if you need to:
On-time bill payment: It takes six months of on-time payments for lenders to see a noticeable difference in your score.
Increase your credit line: Ask your credit card company about increasing your line of credit. But make sure you don’t spend the entire amount so you can maintain a lower credit utilization rate.
Don’t close a credit card account: It is a good idea to stop using an old credit card instead of closing the account. Closing the account can hurt the credit score you’ve built over the years.