Guide To The Credit Score Chart & Credit Score Scale
A person's credit score is derived by doing statistical analysis and it represents the person's creditworthiness. Experian, TransUnion, and Equifax are the three main credit bureaus in the United States that provide credit scores. Be aware that income is not analyzed when calculating credit scores. Instead, the FICO (Fair Isaac Co.) is used as a standard credit score scale. An individual's credit risk is calculated to a score between 300 and 850, with the average American having a credit score of about 723.
Financial institutions such as banks and credit card companies use credit scores to estimate the potential risks posed by giving loans to consumers and to reduce losses due to bad debt. Also, credit scores will determine whether the loan applications are approved, and if they are, at what interest rates they will be offered.
5 factors that determine credit scores:
1. Timely payment on loans (35%) 2. Total outstanding balance on current debts (30%) 3. Length of credit history (15%) 4. Types of credit accounts owned (10%) 5. New credit applications and the types of accounts recently opened (10%)
Understanding a credit report:
700 - 850: Excellent Credit
People under this category are qualified for the lowest interest rates and fair repayment terms.
680 - 699: Good Credit
They will usually be offered favorable terms for loans.
620 - 679: Reasonable Credit
Loans are still offered, but not at good interest rates.
550 - 680: Poor Credit
People with these scores find it difficult to have their loans approved. Even if they are offered, they will be charged high interest rates.
Below 550: Very Bad Credit
People who have very bad credit must consider "credit repair" before applying for loans. Otherwise, it is almost impossible to obtain loans.
Lastly, it is also crucial to know what a credit report is made up of:
- Identifying information - identifies who you are - Credit history - your trade lines - Public records - existing legal proceedings - Inquiries - new credit applications
Better financial decisions can be made by knowing your credit score and how to interpret your credit report.
