It’s a question that pops up frequently when you’re searching for a loan: What is your credit score? Even if you know your score, you may not know how it is calculated and what factors influence it. Take control of that magic number by learning how credit scores work and what you can do to improve yours.
What is a credit score and why is it important?
Credit scores are given to consumers to evaluate an individual’s creditworthiness. They are used by lenders, utility companies, landlords, cell phone companies, and others to determine whether or not you will be approved for services and what type of interest rate you qualify for on loans. The most commonly used credit score is the FICO score, which ranges from 300 to 850. Your FICO score is based upon the following influencers: payment history, amounts owed, length of credit history, types of credit history, and new credit.
What does a credit bureau do?
Three separate credit bureaus provide FICO credit scores: Equifax, Experian, and Transunion. These agencies each collect data on your payment history on accounts like your credit cards, mortgage, and other loans. Some businesses like power companies and cell phone providers also report delinquent payments to the credit agencies. While each credit bureau is a for-profit organization, you may request one free credit report from each one every year. Your credit report will show all of your credit history along with your payments; however, the free report does not contain your actual credit score. To obtain that number, you can either pay one of the credit bureaus or get an estimated score from a free credit score website.
What is a good credit score?
This depends on what you’re trying to do, but 720 is usually the minimum score for receiving the best interest rates on loans. Scores between 650 and 700 are considered fair, and anything below 650 is considered bad. However, your credit score is constantly evolving. The longer you make payments on time and responsibly use your credit, the more your credit score will rise. In fact, nothing stays on your report forever: bankruptcies are removed after ten years and late payments are removed after just seven.
Understanding your credit score is a great step in financial planning, especially when you need a long-term loan for a major purchase like a car or house. Payday loans, however, generally don’t require a credit check, so don’t let your credit score dissuade you from cushioning your wallet in an emergency situation.