What is a credit score? What’s a good credit score, or a bad credit score for that matter?
This is a number given to an individual after a careful statistical study of your credit history. It measures one’s credit worthiness. The average credit score in the United States is 680. Credit scores can range from 300 to 850. A score of 620 is usually used as the dividing line between a good credit score and a bad one. A score of 640 is usually considered good. The higher your score the more credit worthy you are and you will be able to borrow money with a lower interest rate as you will not be a high risk to the lending institution on defaulting on your loan.
A FICO score is the most widely used credit score in the United States. The FICO score is calculated taking into account payment history (35%), debt ratio (30%), length of credit history (15%), types of credit (10%), and number of credit inquiries (10%). A FICO score of 600 and below will make you a risk borrower, a score of 640 and above will mean that you have pretty good credit worthiness, and above 690, you have excellent credit worthiness.
Banks and credit card companies use credit scores to evaluate if you will be a potential risk of defaulting on your credit. This will mitigate their losses due to bad debt. They use credit scores to determine who qualifies for a loan, at what interest rate, and at what credit limit. Other organizations such as mobile phone companies, insurance companies, and even property owners will use the same technique to determine you credit worthiness and your ability to pay for their services.
Remember to maintain a good credit history by taking into account that 35% of your score depends on how diligently you pay your loans and your credit card fees. Always pay on time. Being late on your payments will negatively affect your credit score and hurt your financial planning in the long run.
Also, if the credit bureaus think that you have too much debt as compared to your ability to pay them, it will affect your credit rating negatively.
Credit scores range from 350 to 850. If you have a credit score of 640 and above, it will make you credit worthy and would be able to get loans easier at a lower interest rate. It is not possible to have a perfect credit score, but you can get close to it. Remember to always pay your debts in time, your credit card fees too. If you do this, you will erase bad debts and you will see your credit score rise.
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