What is a good credit score?
OnlineGuideTo.com — Your credit score is an all-important number, more so today than ever before.
Traditionally your credit rating, or credit score, affected your ability to borrow money. However, nowadays it can also have an impact on your ability to find a job, rent an apartment, or get a security clearance.
It almost seems as if your credit score is now more important than your social security number — something many people realize too late.
What is a credit score?
A credit score is a rating number applied to your credit history — the record of how reliable you have been in repaying money that has been lent to you. The better you are at paying your bills, the higher your credit score.
You build a credit history from the moment you receive goods or services before you pay for them: a bank loan, a credit card, or even utilities at your rental flat.
In America three national credit reporting agencies — Equifax, Experian, and TransUnion — collect information about you and your credit history. That information is obtained from your creditors, as well as from public records.
Each of the agencies collects its own information and uses its own credit scoring models. As a result, a person usually has several different credit scores simultaneously.
FICO score
The Fair Isaac Corporation, known as FICO, created the first credit scoring system, and this system is used by credit reporting agencies alongsided their own ones. Today the FICO score is the most widely used credit score, relied on by the vast majority of banks and other lenders.
FICO’s scores are produced with information purchased from the three credit reporting agencies, which means that each person has three FICO scores.
FICO scores randing from 300 to 850. A good credit score is FICO 720 or higher.
While neither FICO nor the three agencies will disclose precise information about their credit scoring formulas, FICO has provided some insight into the components its system takee into account, along with the approximate weighed contribution of each:
- Payment History (35%)
Late payments cause your FICO score to drop, while on-time payments will — over time — improve your score - Credit Utilization (30%)
The ratio of current debt compared to your available credit. The lower your debt compared to your credit limits, the better your FICO scores. Cancelling credit cards does not boost your credit score, but instead negatively affects it. - Length of Credit History (15%)
The longer you have had good credit, the better. - Types of Credit Used (10%)
Revolving credit (as with a credit card), bank loans, installment payments, etcetera — the more different type of credit you have successfully used, the better. - Credit Applications (10%)
Applying for multiple lines of credit, especially across a short period of time, sets of warning bells. Merely shopping around for a better mortgage or care loan usually does not have a negative effect, though
This shows that merely paying your bills on time is, by itself, not enough to guarantee you a good credit score.
Who uses credit scores?
Since credit scores are designed to measure the risk of lending you money, you might think that credit scores are used solely by banks or other lenders.
Instead, credit scores are used for other purposes as well. A good credit score is like a merit badge or a seal of approval. It can open doors and provide opportunies.
For instance, if you are in the market for a new apartment, having a good credit score gives you an edge over someone with a much lower credit rating. Landlords want to rent to people who can be relied upon to make their rent payments on time. You may even have to pay a smaller security deposit.
When hiring new personnel many companies routinely take FICO scores into account. A good credit score is in indication of a responsible lifestyle, while a bad score may well signal a lack of maturity. In addition, people with a good credit score are less likely to be distracted (or to be dishonest…).
Job search:Employers routinely check credit histories and FICO scores in the interview/hiring process. An applicant with “good credit” (FICO 720 or above) appears to be more responsible and less likely to be distracted by financial worries. A good credit score portends maturity and stability — the score a good employee would have.
Insurance issuers tend to provide better rates to those who have a good credit score.
Likewise, if you are starting a business your good credit may make it easier to secure business loans and supplier credit lines.
