What is a Credit Score?

If you have a bank account, an income of some sort, and a credit card or loans, you’ve probably heard of the term “credit score.” Even if you don’t have all or one of these things, you have likely still heard the term thrown around on commercials or in the news. So what is a credit score?

A credit score is the most widely-accepted measure of your ability to make good on your loans, also known as your “creditworthiness.” It is calculated based on a number of factors having to do with your credit history and loans, and it used for a variety of things, mostly for taking out loans (especially mortgages or auto loans) or getting a credit card. There are a few different groups that give credit scores, FICO being one of the most well-known. Credit scores tend to range between 300 and 900. Usually, any score above 700-750 is considered a good credit score.

What factors contribute to a credit score?

There is a certain formula that is often used to calculate credit scores. This formula is payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit in use (10%). Though this is the basic breakdown of a credit score, it can still vary from person to person, and based on who is rating the credit. Depending on how long your credit history is, these factors can vary in consideration. Things like filing bankruptcy can also have major effects on your credit score. Over time, you can build or decrease your score depending on how you handle your finances, loans, and payments on debt.

What impact does your credit score have?

Your credit score may not seem to play much of a role in your day to day life, and it probably doesn’t. But when you want to take out a loan, rent an apartment, or get a credit card, your score can haunt you. This is especially true if you are looking into auto loans. The better your credit, the lower your interest rate on an auto loan will be, so you want to ensure your credit score is as high as possible before taking out a loan. Loan lenders, creditors, and just about anyone who is offering you something with the expectation of being paid back will want to see your credit score.

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