Your credit score is an essential piece of your financial health. It comes into play whenever you’re seeking new financing. That includes auto loans, mortgages and new credit cards, among other financial products. If you’re looking to rent a new apartment, your credit will typically be part of the qualifying criteria.
This begs one important question — what’s a good credit score? If you don’t know, you’re not alone. A 2019 LendingTree survey found that 37% of Americans have no idea how it all works. We’ve put together this brief but thorough explainer to help you make sense of your credit score.
What is a credit score?
Let’s first talk about what a credit score is. Lenders look at this three-digit number to help them decide whether or not to approve you for new credit. A high score indicates a strong history of paying your bills on time and using credit responsibly. On the other end of the spectrum, a lower score suggests that you may be a risky borrower. What they’re looking for is reassurance that you’ll indeed pay your bill on time each month. Your credit score helps them determine how likely you are to default.
There are several different brands of credit scores, but FICO is a leading credit scoring model that’s a go-to source for many lenders. In fact, 90% of top lenders use it. Your FICO credit score can range anywhere from 300 to 850.
How is my credit score calculated?
Your credit score is determined by the information on your credit reports. Whenever there’s a credit account in your name, the lender usually reports your account activity to the three major credit bureaus — Experian, Equifax and TransUnion. Each maintains its own credit report for you. They reflect things like your payment history, account balances, credit usage, and past-due accounts. When taken together, these details shape your credit score.
Certain credit data is more important than others. Below are the factors FICO uses to determine your score:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
What’s a good credit score?
To make sense of your credit score, it’s helpful to understand the FICO scoring range. Here’s how it shakes out:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800+
According to ValuePenguin, the average FICO score is 711, which is square in the middle. The higher your credit score, the more likely you are to get approved for new credit. You’re also more likely to get a lower interest rate when compared to someone with less-than-perfect credit.
Ways to improve your credit score.
If you’re feeling like your credit score could use some work, know that it’s always possible to get moving in the right direction. Being intentional and making a plan for improving your credit score is your best course of action.
- Pay your bills on time each month. As mentioned earlier, your payment history is far and away the most important factor that determines your credit score. Getting in the habit of making regular, on-time payments can go a long way. Turn on auto-pay, then set it and forget it. Now is also the time to settle any delinquent accounts, especially if they’ve gone to a collection agency. You may be able to negotiate a payment plan to get them in good standing.
- Get your balances down. Credit usage, which falls under the “amounts owed” category, is another critical component. This considers how much you owe in relation to your credit limit. Experts recommend keeping your credit usage below 30% of your available credit. If your credit cards are all maxed out, aim to get your balances below that threshold — it may be enough to give your credit score a boost.
- Check your credit reports for errors. It’s wise to routinely check your credit reports. This way, you’ll know what lenders are looking at whenever you apply for new credit. You can do this for free at AnnualCreditReport.com. Once you have your reports in front of you, scan them for red flags. Come across any accounts you don’t recognize? Or account balances that seem higher than they should be? These could be signs of identity theft. This happens when someone uses your personal information to rack up debt that goes unpaid.
- Simple Ways to Improve Your Credit Score
If you do spot anything fishy, you can contact the credit bureaus to dispute it — and ultimately have it removed from your credit reports. It’s a simple act that could increase your score pretty significantly.
Checking your credit score is a great way to stay on top of your financial health. As the old saying goes, knowledge is power. Many credit card companies make it available to account holders as a free perk. You can also access it through any of the major credit bureaus. No matter how you check your credit score, DailyPay is here to help you manage your income without the stress — something that’s at the core of financial wellness.
