A credit score is a number with three digits that evaluates how creditworthy you are. FICO scores can be anywhere between 300 and 850. The higher your score, the greater your chances of getting approved for loans and receiving better interest rates. So, Credit Score Definition.
Your credit score is determined by your credit history, which consists of details such as the number of accounts, total debt levels, repayment history, and other factors. Lenders utilize credit scores to assess your creditworthiness, or the probability of you repaying loans on time.
There are three main credit bureaus in the United States: Equifax, Experian, and TransUnion. These three companies control the market for gathering, evaluating, and distributing data about consumers in the credit industry. The credit score model was developed by the Fair Isaac Corp., which is now called FICO, and it is widely utilized by financial institutions. Although there are other credit scoring systems available, the FICO Score is the most widely adopted.
Your FICO credit score is determined by several factors, such as your repayment history, debt utilization, credit history length, credit mix, and new account openings. Lenders use this score to decide if they will approve you for mortgages, personal loans, and credit cards, as well as the interest rates you’ll be charged.
How Credit Score Works
Your credit score has a big impact on your finances. It greatly influences whether lenders will give you credit or not. If you have a higher credit score, you have a better chance of getting approved for loans and getting lower interest rates. On the other hand, if your credit score is low, lenders may reject your loan applications and you may end up paying higher interest rates.
On the other hand, lenders usually see a credit score of 700 or above in a good light, which could lead to a lower interest rate. Scores above 800 are seen as outstanding. Each lender has their own credit score ranges and lending criteria. Here are the typical categories for credit scores.
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
Conclusion
Having a good credit score can greatly affect your financial life. It increases your chances of getting approved for loans and receiving favorable terms that can save you money. Understanding how your credit score is calculated and what factors contribute to it can empower you to make improvements.