A credit score, also called a FICO score, is an actual number, between 300 and 850. The higher the number, the better; a score of 740 to 799 is considered very good, though the average is closer to 700. FICO is an acronym for Fair Isaac & Co., the company that is responsible for tabulating credit scores.
Each of the three main credit agencies – Experian, Equifax and TransUnion - have a score for you based on your credit report at that individual agency. Each agency has more than 200 million files on people who have a credit history because they have used credit and 4.5 billion are updated in those files every month. The agencies tend to have different information on the people they track, which means your credit report and score will vary from agency to agency.
The scores are what potential creditors, landlords, employers and insurers look at for an instant judgement on your creditworthiness.
This is important because lenders believe those who are creditworthy will pay back what they owe. That’s why better credit reports and higher credit scores tend to make it easier to borrow. It also can make it easier to rent an apartment or buy a house, get a job, buy insurance and a number of other day-to-day essentials.
Sources of Data
Credit scores are the result of a compilation of several different sources of data that are available in your credit report. That data falls into five distinct categories, which are listed in order of how much weight they usually have in informing your score:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
You’ve heard before that paying credit card bills on time is crucial – and the list above is why. Your payment history – if you pay on time, if you pay in full or only the minimum balance and if you have late or missed payments – is the single most important factor in determining your credit score.
Avoiding a Bad Score
There are two ways to have a bad credit score. The first is by not using credit wisely. That means spending more than you can afford, not paying your bills on time and having too much outstanding credit, often spread across multiple credit card accounts.
The second is that you can have a bad credit score if you don’t use credit at all. You have to actually use credit to have a good credit score. So simply cutting up your credit cards or never having a credit card account, isn’t the path to a high credit score.
What Doesn't Count
One important thing to know about credit scores is that the information is limited to how you use credit – there is no information about your race, religion, medical history or lifestyle. There’s not even any data on your checking and savings accounts or your investment accounts. It’s all about how you use credit.
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