When potential lenders try to decide whether to loan you money, how much they’re willing to loan you, and at what interest rate, one of the things they consider is your credit score. This three-digit number is based on information in your credit report and provides a sort of report card letting lenders know how risky it is to loan money to you. If you’re wondering how credit scores work and what to do to improve yours, it’s time for Dovly 101: Let’s Talk Credit Scores.
Types of Credit Scores
Equifax, TransUnion, and Experian are the three major credit bureaus. Each bureau gathers information on how well you handle the money you’ve borrowed such as credit cards and loans. Banks, credit unions, car dealers, and other lenders aren’t required to report to all three credit bureaus, so the information on each credit report may be slightly different.
FICO, formerly known as Fair Isaac Corporation, is a data analytics company that created the first credit score model. FICO continues to be the credit score model used most often in credit decisions. Another scoring model is the Vantage Score, a newer model created by the three credit bureaus.
Range of Credit Scores and What They Mean
For all scoring models, higher numbers are considered better scores. Both FICO and Vantage scores range from 300 to 850. While different lenders may have different opinions on what credit scores they find acceptable, a credit score between 670 and 739 is usually considered a good score, 740 to 799 is very good and 800 or higher is exceptional. If your score is between 580 and 669, it’s usually considered fair and below 580 is poor. Lower scores don’t necessarily mean no one will loan you money, but you may have to pay a higher interest rate to get a loan.
In order to have a credit score, you have to have a credit history. If you’ve never borrowed any money, you’ll be considered a high credit risk.
Why Does Your Credit Score Matter?
A good credit score can make all the difference in regard to whether or not you’re able to get a loan, mortgage, or credit card when you apply. It can also affect whether you’re able to get the best interest rates. If there are red flags on your credit reports such as late payments or credit cards that are almost maxed out, you may need to get someone to co-sign your loan in order for you to be approved for credit.
Being able to borrow money isn’t the only place that a good credit score matters. Credit reports and credit scores are sometimes considered if you’re purchasing insurance, trying to rent an apartment, or applying for a job.
Information Considered to Determine Your Score
Credit scores are based on a combination of factors related to the way you’ve handled money up until now. Things that are used include:
- Your payment history and whether you’ve paid late in the past
- The total amount you owe to all your creditors, and the percentage of available credit you’re using on revolving accounts
- The length of your credit history, which includes considering the age of your oldest account and your newest account
- The different types of accounts and whether you have experience handling more than one type of credit
- How many new accounts you’ve opened in the past year, along with how many credit inquiries have been done
The weight given to each factor may vary, but all of these factors are important. For most scoring models, the most important factors are your payment history and your total debt.
Factors That Bring Down Your Credit Score
There are several different things that can cause your credit score to drop slightly such as making a late payment or applying for new credit. If you change a credit limit or close an account, it can have a negative impact on your credit score. Trying to apply for too many things in a short period of time may appear to be a red flag to potential creditors.
Negative items stay on your credit report for at least seven years. If you’ve experienced foreclosure, having an account end up in collections, or filing bankruptcy, these life events can bring down your credit score. Another thing to keep in mind is that your credit score may go down if there are any errors being reported on your credit report.
What to Do to Bring Up Your Credit Score
Bringing up your credit score means developing better money habits. If you have any accounts that are past due, work to get them caught up right away. Be careful to make all payments on time. Avoid closing credit card accounts that you aren’t using, because this reduces your available credit and can affect your credit utilization rate. If you’re using a large percent of your available credit, consider getting a personal loan to consolidate your debt.
Check what’s on your credit reports at least once a year and make sure there aren’t any inaccuracies on these reports. You may find that your creditors are reporting wrong balances or late payments that aren’t accurate. You might find items that don’t belong to you on your credit report. Any errors you find on your credit report should be disputed right away.
Be Proactive About Improving Your Credit Score
Your credit score matters, so be proactive about taking care of your credit and do whatever you can to bring up a poor score. Need help disputing errors on your credit report? Dovly makes this process easy. Let us know what items need to be disputed, and we do all the heavy lifting while you sit back and watch your score go up. Dovly is an automated credit repair engine that works 24/7 to track, manage and help you repair your credit. Reach out to Dovly today and get on the path to a better credit score and better credit opportunities.