A credit score affects many areas of your financial life. It's important for your financial success to understand what a credit score is, how it works, and how it's calculated. Here are the basics.
What is a credit score?
A credit score is a number that helps lenders assess how well past financial obligations have been managed.
What makes up a credit score?
- Payment history; be sure to make at least the minimum payments and payments are made on time.
- Amounts owed; high balances can hurt your score. Try not to max your credit cards or credit lines - it's best to keep these balances 30% or below the total credit line.
- Length of credit history
- Types of credit; Having a mix of credit types - credit cards, student loans, mortgage, an auto loan- is good for your overall score. This shows you can handle multiple payments at a time.
- Credit inquiries; Applying for and opening several new credit accounts in a short period of time can negatively affect your score.
What do the numbers mean?
Scores typically range between 300 and 850 and can change monthly. In general, the ranges correspond to the following ratings.
- 800-850 = Exceptional
- 740-799 = Very good
- 670-739 = Good
- 580-669 = Fair
- 300-579 = Poor
Now that you understand what goes into calculating a credit score you are ready to learn how to improve and how to read your report.