Credit Scores Explained

Written By Scott Kessman
Last updated March 5, 2021

Note: We receive a commission for purchases made through the links on this site. Our sponsors, however, do not influence our editorial content in any way.

Credit
March 5, 2021

Simple. Thrifty. Living.

As you grow older, you’ll realize that many actions will depend on having a good credit score. But what exactly does that mean? What is a good credit score? Why is it so important to have one?

Believe it or not, a good credit score is important during all stages of your life. However, without having credit scores explained in detail, you probably don’t really understand why. The information that follows will explain to you exactly why you must strive to have a good credit score. You’ll also learn how credit scores are calculated based on your financial activity.

A credit score is a simple, three-digit number. Credit card companies, lenders, utility companies, and many other institutions use the number for various reasons. Most often, a lender will determine the risk involved in loaning money to an individual based on the credit score. Additionally, credit card companies will use your credit score when you apply for a credit card.

For example, a lender who will consider granting a loan to someone with a very low credit score may decide not to grant the loan. That’s because the credit score shows a high likelihood that the person will default on the loan. On the other hand, someone with a high credit score will have a much easier time getting a loan.

Credit Score Ranges

Your credit score, determined using your credit history, ranges from 300 to 850. There are three major reporting credit bureaus that determine your credit score: Experian, TransUnion, and Equifax. Each credit bureau will factor your credit score a little differently. As a result, your credit score explained by each bureau will differ slightly. However, they are typically close to one another.

Types of Credit Scores

There are also two types of credit scores — generic credit scores and custom credit scores. Generic credit scores are what most businesses and lenders see when they check your credit. Your generic score is typically a combination of all three scores from the above credit reporting agencies.

However, custom credit scores are actually scores that lenders develop using several criteria. This will include your account history, credit reports, and other factors. Lenders and businesses develop custom credit scores to make their own determination of credit risk. They possess their own set of rules and guidelines that differ from those of the credit reporting agencies.

For example, a late payment that is reported to a credit reporting agency will negatively impact your score. If your score was already high, it might not affect you too badly. However, a particular business might have its own thoughts on late payments. Based on their own criteria, lender or financial institution will generate a lower, custom credit score for you.

Several specific factors can explain your overall credit score. This includes the amount of total debt you currently have, the age of your credit accounts, and what types of accounts you have. Based on these factors, the credit reporting agencies will establish a base credit score for you. Other factors will influence this score to fall or rise. Late payments will cause your score to fall, while always paying on time will cause your credit score to steadily rise.

Other factors that may affect your credit score include having too many credit inquiries in a short time period. Rotating debt is another reason (moving a debt balance from one card to another too often). These bring your credit score down. On the other hand, a healthy mix of accounts comprising credit cards and loans that are always paid on time can improve your score.

As mentioned above, the criteria regarding credit scores explained vary from each credit reporting bureau. They also vary from one financial institution to another. However, what is considered poor or good or excellent all fall within a close range of a specific number.

According to Experian’s criteria, anything from 300-579 is very poor, 580 to 669 is fair, and 670 to 739 is good. Above that, 740 to 799 is very good, and 800 to 850 is exceptional.

What Score Do Lenders See?

When lenders and other organizations check your credit score, they usually receive a report with the middle number of the credit bureaus. Subsequently, no one credit bureau is more important than another. But it is best when lenders and businesses report information to all three bureaus so that the scores are fairly consistent.

Note: If you begin a loan process with a lender, they will conduct a hard credit inquiry. They receive a much more detailed report. Too many hard inquiries within a short time can also negatively affect your score.

When a lender or other institution looks at your credit scores, they aren’t just determining your credit risk factor and how likely you are to make your payments. They also offer you terms and rates that will vary based on your score. Higher credit scores receive more favorable interest rates on loans. Those with lower credit scores will receive higher interest rates on a loan and may also have to make a down payment or get a co-signer.

Utility companies or rental properties will examine your credit score before allowing you service or a place to rent. Many credit card companies will probably still approve you for a credit card even if you have a low credit score. However, you will probably have a very low credit limit and a high interest rate.

Review Your Reports

As mentioned above, it can be a good idea to review your credit reports periodically. This way, you can see how the score improves or declines. It can also provide you with some insight into what you need to do to raise your score higher. Many credit cards let you see your credit score on a monthly basis too, showing how your score might fluctuate from month to month.

While hard credit inquiries from lenders and other institutions may hurt your credit, checking your credit yourself will not when you conduct a soft inquiry. You can do this using a service or requesting your yearly free credit report from the credit bureaus.

About the Author

Scott Kessman

I possess a strong 20-year background in marketing, digital marketing, and advertising. However, writing has always been a true passion of mine, and after working in corporate offices for many years, I turned my passion for writing into a full-time job. As a contract content writer for the last 12 years, I can craft engaging and informative content about a wide variety of subjects. I have also written and published two fantasy novels and a collection of short stories.

  • No comments yet. Be the first to get the conversation started. Here's some food for thought:

    Do you have any thoughts?

Submit a Comment

Your email address will not be published. Required fields are marked *