Credit Score

Credit Score

What Is A Credit Score?

The credit score model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions. While there are other credit-scoring systems, the FICO score is by far the most commonly used. 

Consumers can possess high scores by maintaining a long history of paying their bills on time and keeping their debt low. 

A credit score plays a key role in a lender’s decision to offer credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score. Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in them paying less money in interest over the life of the loan. 

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A person’s credit score may also determine the size of an initial deposit required to obtain a smartphone, cable service or utilities, or to rent an apartment. And lenders frequently review borrowers’ scores, especially when deciding whether to change an interest rate or credit limit on a credit card. 

While every creditor defines its own ranges for credit scores (for instance, many lenders think anything over 800 is excellent), here is the average FICO score range:

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

Credit Score Factors

There are three major credit reporting agencies in the United States (Experian, Transunion and Equifax) which report, update and store consumers’ credit histories. While there can be differences in the information collected by the three credit bureaus, there are five main factors evaluated when calculating a credit score:

  1. Payment history
  2. Total amount owed
  3. Length of credit history
  4. Types of credit
  5. New credit 

Payment history counts for 35% of a credit score and shows whether a person pays his obligations on time. Total amount owed counts for 30% and takes into account the percentage of credit available to a person that is currently being used, which is known as credit utilization. 

Length of credit history counts for 15%, with longer credit histories being considered less risky, as there is more data to determine payment history.

Types of credit used counts for 10% of a credit score and shows if a person has a mix of installment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards. New credit also counts for 10%, and it factors in how many new accounts a person has, how many new accounts they have applied for recently, which result in credit inquiries, and when the most recent account was opened.