In today’s society, everyone seems to own a credit card, and the term “credit” gets loosely thrown around. The truth of the matter is that credit is a huge part of being able to finance just about anything big—like a house or car. Your credit score determines what you can and can’t finance, whether you can get approved for credit cards, your interest rate on credit accounts, and so much more.
So, what exactly is a credit score, and what’s important to know about them? Here is a breakdown of how credit scores work, and why you should care about yours.
What is a Credit Score and Where Does it Come From?
Credit scores are one of the main ways lenders can evaluate the risk associated with lending money to a person. Your credit score sets parameters of a loan, such as the amount the lenders are willing to loan, the interest rate, etc.
Basically, it's a number that represents how well you've handled credit. Future creditors use it to predict how reliable you're going to be at paying them back if they approve you. The three major credit reporting agencies—Equifax, Experian and TransUnion—collect your credit information into reports, and credit scores are created based on those. Two of the most common credit scores are FICO and VantageScore.
FICO’s five factors, in order of importance, help make it easier to understand how your score is distributed:
- Payment history: 35%
- Credit Utilization or debt: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
You are entitled to one free credit report from each of the major credit bureaus every 12 months. Fortunately it’s fairly cheap to request for another copy, a credit reporting company can only charge up to $12.00 by law.
If you want to view your credit score, it will not be found on your reports. There are a ton of ways to access yours, but you may need to pay a small fee, though the cost varies depending on how you get it and what state you live in.
It’s also important to note that you have more than one credit score at a time, and that these multiple scores change constantly depending on the five factors mentioned.
Is My Credit Score Good?
A good rule of thumb is the higher the number, the better the score. 850 is the highest possible someone can have, and a score of 620 or below is considered to be poor. But depending on the person and their situation, what constitutes a “good” score can vary. If your credit score isn’t spectacular and you need an auto loan, Drivers Lane can help. Get started by filling out our free and easy car loan request today.