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Credit Score

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A credit score is a numeric representation of the information on your credit reports. Credit scores predict consumer credit risk and credit behavior. They are almost always based wholly or partially on information in your credit reports.

Your credit score is a number that affects everything you do - it can affect your ability to get a job, rent an apartment, get a cell phone, and buy a car or home. It's incredibly important to not only be aware of your credit score, but to be on top of making sure it's correct and there are no inaccuracies. SmartCredit® allows you to see your score, as well as specifics on the items that are negatively affecting it.

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Credit scores range from 300 on the low end to 850 on the high end (using the FICO scale). The higher the score the lower your credit risk. The lower the score the higher your credit risk.

Credit scores are usually built using consumer credit data from each of the three major credit reporting agencies; Equifax, Experian and TransUnion. Statistical analysis is conducted using current and historical credit data to determine what's predictive of future credit behavior. This is called "regression."

Many people believe only a score is delivered when calculated, which is not true. The score is accompanied with explanations of why you didn't receive the maximum score. These explanations are called Score Factors or Reason Code. They are the top four reasons, in order of importance, why your score isn't higher. These score factors can be used as a roadmap for Homeimproving your credit score.

  1. Current and historical payment history:- Are you paying your bills on time? If not, how delinquent are you? If you are delinquent, how often are you delinquent? And finally, how long ago were you delinquent?
  2. Amounts you owe:- How much debt do you have? What type of debt is it? Are you maxed out on your credit cards? How many accounts do you have with a balance?
  3. Length of time had credit:- What's the oldest account on your credit report? What's the average age of your credit accounts?
  4. New credit :- How many new accounts have you recently opened? How many inquiries do you have in the past 12 months?
  5. Mix of credit used :- Do you have a diverse set of accounts on your credit reports? Or, are you just using credit cards?

Credit grantors use credit scores to approve mortgages, auto loans, and credit cards. There is no single universal score required by lenders to approve or deny any application. Each credit grantor selects their own credit score threshold based on their experience and risk appetite.

The score is used to make "approve or deny" decisions, set interest rates, determine what products to offer (premium cards versus subprime cards). Those with the highest scores get the best interest rates, which saves them an enormous amount of money.

For example, let's take a car financed at $25,000 over 48 months using credit scores to set the rate. With a credit score of 750 you'll likely get an interest rate of 4.8% (the best interest rate), which means your monthly payment will be $573. With a credit score of 650 you'll likely get an interest rate of 11.7%, which means your monthly payment will be $655. The "lower score" payment is $82 more per month for the same exact car. The total interest paid with the lower score is $6,440 compared to only $3,936 with the higher.

The best way to earn a high score is to pay your bills on time, pay your bills in full, don't use more than 10% of your credit limit on credit cards, don't open new accounts unnecessarily, and don't close older accounts.

A credit score plays a vital role in everyone's financial life. Whether you're applying for a credit card, personal loan, or a mortgage, lenders need to know whether or not you are likely to repay that loan. When making that evaluation, your credit score is one of the first things that lenders assess.

In short, a credit score is a snapshot of your financial life and credit history. The credit score itself is calculated using information from your credit report. Once calculated, your credit score provides lenders the insight in determining whether or not you will be able to pay back any loans or lines of credit.

So, what does an actual credit score look like? Credit scores are determined as three-digit numbers, typically between the range of 300 to 850. The higher the score, the better likelihood you have of being accepted for a loan, credit card, or lower interest rates, while lower credit scores can potentially hurt your chances.

Below, we'll take a closer look at the overall range of credit scores that are used.

Credit reports are divided into several key areas of information, including personal data, account (or "trade") information, inquiries, collections, and public records.

Poor: 579 or below

Well below the average U.S. consumer and demonstrates potential risk.

Fair: 580-669

Below the average U.S. consumer and still demonstrates risk, but some lenders will approve this score.

Good: 670-739

Slightly above the average U.S. consumer and most lenders will approve this score.

Very Good: 740-799

Above the average U.S. consumer and demonstrates credit dependability to lenders.

Excellent: 800 or above

Well above the average U.S. consumer and demonstrates exceptionally low risk to lenders.

As previously mentioned, a credit score is a valuable tool that lenders use to help them determine potential risk with a consumer. However, credit scores aren't merely a randomly calculated score. In fact, several key details are involved in generating a credit score, some of which consumers may not even be aware of.

Payment History

The most significant factor that affects your credit score is your payment history. Payment history accounts for nearly 35% of a credit score and refers to the history you have with paying bills on time. Payment history includes payments such as credit card bills, student loans, car loans, and mortgages.

Typically, creditors will report your payment activity to all three of the major credit reporting agencies. While a single late payment isn't likely to negatively affect your credit score, multiple late payments certainly will hurt your credit score.

Amount of Debt

Another critical factor in your credit score is the amount of debt you have, otherwise known as the "credit utilization ratio." This accounts for nearly 30% of a credit score and is calculated based on the credit limit(s) extended to someone by their creditors, and how much of that credit has been used.

The credit score checker can help creditors determine whether or not someone is a high-risk or low-risk borrower.

Credit Age and History

Much like payment history, your history with credit also plays a critical role in determining your credit score. Credit age accounts for nearly 15% of someone's overall credit score and is determined based on the age of your oldest account, and the average age of all of your accounts combined. The older the accounts, the more it helps your credit score.

Account Mix

Accounting for almost 10% of a credit score is an account mix. Account mix includes items such as revolving debt (credit cards) and installment debt (loans). It's best to have a combination of both to have a good credit score.

Credit Inquiries

Lastly, credit inquiries account for roughly 10% of a credit score and refer to two specific types of inquiries: soft and hard. Fortunately, soft inquiries do not have an impact on credit scores. However, hard inquiries can hurt your credit score, which means it's best to have as few hard inquiries as possible.

Now that you have a general understanding of what goes into calculating a credit score, let's take a look at a few different ways your credit score can be affected both positively and negatively.

Pay Your Bills on Time

One of the best ways to improve any credit score is by paying all of your bills on or before the agreed-upon due date. Credit card bills, auto loans, and student loans are only a few of the most common bills that consumers have, but these can also extend to rent, utilities, and phone bills, as well.

A great way to always ensure on-time payments is by setting up automatic payments or creating calendar reminders to prevent any bill from being forgotten about.

If you have any outstanding bill payments, it's essential to bring them current as quickly as possible. The good news, however, is that although late payments do negatively affect a credit score, their impact eventually declines over time.

Pay off Debt and Keep Balances Low

As mentioned earlier, the credit utilization ratio is critical in determining a credit score and is calculated by how much credit you have been extended and how much has been used.

Don't Close Unused Credit Cards

Another way to improve a credit score that often goes overlooked is by keeping unused credit cards open. While it may be tempting to close the account, doing so can actually hurt your credit score due to the credit utilization rate, as earlier mentioned. So long as the open credit isn't charging you annual fees, keeping it open is your best option.

Dispute Inaccuracies on Your Credit Reports

As with many things in life, mistakes happen. They can also occur on credit reports and, in turn, hurt your credit score. This is why monitoring a credit report for any inaccuracies is extremely important.

If any errors are noticed, disputing the information, and seeing that it gets corrected can improve your credit score before it gets dragged down further.

Reporting Errors

As previously mentioned, mistakes and errors on a credit report can drastically affect a credit score. While most errors on credit reports occur from data entry mistakes, they can also potentially indicate instances of identity theft.

If multiple errors are seen on a credit report, disputing each error separately with the credit reporting agencies can prevent permanent damage to your credit score.

Parking Tickets and Utility Bills

Just as phone bills and auto loans are subject to affect a credit score, utility bills and unpaid parking tickets can also negatively affect a credit score. If either is left unpaid for a long enough time, they will be sent to a third-party debt collector who will then report it to the credit reporting agencies.

While both can be expensive, paying them off as quickly as possible can save a lot of time, money, and hassle.

Paying Off a Loan

Much like closing a credit card, paying off an auto loan can also impact a credit score. While paying off any loan is something everyone looks forward to, closing the loan can also negatively affect the credit score.

The good news is, depending on how many other accounts are open on the report, the effect on the credit score will be relatively small and can be improved in a brief amount of time.

A credit score checker is a powerful tool for everyone. Not only can a high credit score help you qualify for low-interest rates, but it can also help open up a lot of doors of opportunity when it comes to renting an apartment or buying a new home.

On the other hand, a low credit score can cost you a lot of money in the long-term and make it harder to get ahead financially.

Considering the importance of good credit to your financial well-being, it's critical that you do everything you can to ensure it always remains in good standing. From regularly checking your credit report to disputing any potential errors you may find, every step matters when it comes to you taking control of your finances.

Looking up your credit score with SmartCredit® has never been easier. Sign up with SmartCredit® today to see where your credit stands and how you can start improving your credit score immediately.