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What is a Credit Score?

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  • by Joseph Priebe|
  • March 28, 2019 |
  • Credit

A credit score is the three-digit number generated with an algorithm using information from your credit report

A credit score is the three-digit number generated with an algorithm using information from your credit report. The purpose of your credit score is to predict the risk of whether or not you will pay back your credit obligations in the next two years. Your credit score falls into a range between 300 - 850 and is used by lenders to decide whether they should offer you credit and what kind of terms, such as interest rate or down payment, they should provide you. There are many different scoring models that creditors can choose from, but the most commonly used calculator is the FICO credit score with, 'more than 90% of top lenders' prefer to use FICO to gauge a borrowers creditworthiness.

What Goes into Your Credit Score?

Your credit report data goes into five different categories that make up a FICO score with some categories having higher influence than others.

The five major FICO groups are:

  • Payment history 35%
  • Amounts owed 30%
  • Length of credit history 15%
  • Types of credit used 10%
  • New credit 10%

Payment history: 

Your account payment history including any delinquencies (late payments; the number and severity of these payments as well) and public records (bankruptcy, civil judgments, or tax liens). This is the most influential category for calculating your credit score.

Amounts owed:

How much you owe on all of your accounts, this includes credit card payments and loans. The amount of money you're using on revolving accounts is heavily weighted (a revolving account is an account created by a moneylender to represent the debts where the outstanding balance does not have to be paid in full every month by the borrower) This is also a highly influential category.

Length of credit history:

How long ago you opened accounts and the activity on them. This is a moderately important category.

New credit:

Any attempt to get new credit, this includes credit inquiries and recently opened accounts. This is a less influential category.

Personal information such as age, race, address, marital status, income, and employment cannot affect your score (U.S. Law restricts credit scoring algorithms from taking these facts into consideration and any receipt of public assistance or the exercise of any consumer right under the Consumer Credit Protection Act). Take note that although your income and employment do not factor into your credit score, when you are applying for credit your lender may consider these things for their approval decision. Your demographic information (where you live) also cannot affect your score.
U.S. Law credit scoring recipes from thinking about these realities, any receipt of open help or the activity of any purchaser directly under the Consumer Credit Protection Act
You also shouldn't worry about checking your credit score, only certain types of credit inquiries affect your credit score, you can check however often you choose to make sure your credit stays in good condition.

What Is a Good Credit Score and Where Can I Find Mine?

After all of this, you may be saying to yourself, 'Okay, I understand how FICO calculates my credit score, but what is a bad credit score? Alternatively, what is a good credit score? moreover, How do I view my credit score?' Well don't worry, there are so many ways to view your credit score, and it won't cost you a penny. An easy way to see your credit score is to use Credit Karma. There are also a variety of other options. All FICO scores are available through all of the major consumer reporting agencies in the United States: Equifax, Experian, and TransUnion.

In general, FICO scores in the 800-850 range are considered excellent with 19.9% of people falling into this category. Receive the best interest rates from lenders.

740-799 is considered very good with 18.2% of people falling into this category. These applicants receive better interest rates from lenders.

670-739 is considered good with 21.5% of people falling into this category. Only 8% of applicants in this score range are likely to become seriously delinquent (overburdened by debt) in the future.

580-669 is considered fair with 20.2% of people falling into this category. These applicants are deemed subprime borrowers.

Below 579 is considered very poorwith 17% of people falling into this category. People with this credit rating often have a hard time getting approved for credit at all and if they do they may be required to pay a fee or deposit.

A credit score is the three-digit number generated with an algorithm using information from your credit report. The purpose of your credit score is to predict the risk of whether or not you will pay back your credit obligations in the next two years.

Why Does My Credit Score Matter?

Loan specialists utilize your credit score to decide the kind of loans you can get and what the interest rates on those loans are going to be. The better your credit score, the better deals you will be able to get from the lenders because they use credit scores to anticipate how likely you are to repay your loan on time, it helps the lenders assess the risk they are taking in lending you money. Just because you have a good credit score doesn't necessarily mean that you will get the lowest interest rates on a loan or get approval for credit, but it does help. Even if you have a bad score, you can use this information to see what areas you can improve before you apply for a loan. Your credit score is also not the only thing that lenders look at when you are looking to take out a loan. They may also decide to look at your total monthly expenses and your monthly income (your debt-to-income ratio) regarding the type of loan you are seeking.

How Can I Improve My Credit Score?

If you've had issues with debt in the past and are wondering how to get credit, or building credit fast, there are many things that you can do. Your credit score reflects patterns over time, and only keeps track of the last seven years while placing more emphasis on recent information. With this in mind, start by making sure you are paying your current bills on time and try to prioritize paying off any delinquencies you have (if you have any). Try to keep your balances low on credit cards because high outstanding debt on revolving credit accounts can have a significant adverse effect on credit score. Don't open too many credit accounts, opening new accounts to have a better credit mix probably won't improve your credit score. However, you also shouldn't close any old accounts you have, owing the same amount but having fewer accounts may also negatively affect your credit score.

One thing that many people don't realize is that there is nothing a credit repair service can do that you can't do for yourself. Hiring one of these companies can end up costing you hundreds to even thousands of extra dollars that you could have saved by managing your debts and yourself. Back in 1997, the United States passed a law called the Credit Repair Organizations Act that essentially ensured that companies didn't scam people for their money.

What did the Credit Repair Organizations Act Do?

  • Prohibited companies from taking consumers money until they fully completed the services they promised.
  • Companies are legally required to provide a written contract of all the services they are going to offer. The consumer has three days to withdraw from the contract after signing.
  • Are forbidden to suggest that you try to mislead credit reporting companies about your accounts or try to change your identity.
  • Cannot knowingly make false claims about the services they are providing.
  • You cannot sign anything forfeiting your rights under the Credit Repair Organizations Act, and even if you do it cannot be enforced.
  • Since credit repair companies can't do anything that you couldn't do yourself, it is essential to understand what kinds of solutions there are to improving your credit score.

The most critical factor is payment history. When a lender requests a credit score for you and reviews your credit report, what they are looking for is payment history. This is because they are concerned about how reliable you are in paying your bills because that usually indicates how you will perform in the future. You can influence your credit score by paying all your bills on time, and this includes utilities, phone bill, rent and not just loans or credit card bills you have.

You should also pay attention to your credit utilization rate, which is found by dividing all your credit card balances by your total available credit limit. This applies to both your credit utilization rate across all of your cards and for each card that you own. Lenders like to see credit utilization rates around 30% or less, so it's vital that you continue to pay off your debts and keep your credit card balances low. For example, if you have a credit limit of $6,000, you should try and keep your spending or your total card balances below $1,800 to keep your credit utilization rate low. Another way to lower your credit utilization rate is to get a higher credit limit on your cards without opening any new ones (as we discussed before, hard inquiries on your credit will hurt your credit score). This will increase the amount that you can spend without going over that 30% invisible limit that can damage your credit. Opting for this option can be a risky move; however, it can tempt you to spend more and place you further into debt.

A fast way to build credit is to minimize any outstanding debts that you have, continue to pay off any quick cash loans for bad credit and make sure not to make late payments. Try to avoid overspending, or spending more than you can pay back as well as needlessly applying for credit as this will create hard inquiries on your credit report. Improving your credit score takes a concerted effort on your part, you may have to change the way you budget and cut back on any expenses that aren't necessary. This means staying at home to eat instead of going out to a restaurant or partying with friends at your local bar or club.

It can be hard to manage all of your debt and obligations each month if you are in need of financial assistance you might want to look into getting a reputable credit counselor to help you manage your debts and develop a program to help pay back what you owe. Many credit counselors will are non-profit and will charge small fees or even no fees for their services. You can see more information about credit counseling services and select a credit counselor yourself at the National Foundation for Credit Counseling. Another option you have for managing your debts is to try and consolidate your debts through a personal loan. This way you only need to make one payment each month, and you could even get it at a lower interest rate than you currently have as long as you qualify for one of their programs.

Loans with No Credit or Bad Credit

If you do have bad credit, it's not the end of the world. Not only are there plenty of ways to build credit, but there are also lending companies out there that are willing to take the risk on those with either bad credit or no credit. So if you were wondering, Can you get a loan with no credit? The answer is yes. Many of these loans will also allow you to build credit if you make the payments on time. If you do have an emergency and are in need of money, you can stop in at CASH 1 or go online to get a secured loan. All you have to have is a vehicle to use as collateral and a steady source of income, this includes SSI and Disability, and you'll be able to get a loan from $100-$50,000! Check us out at https://www.cash1loans.com to see what type of loan best fits your needs.

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