Did you know that 37% of Americans don't know their credit score?
Do you know what your credit score is?
Knowing your credit score and understanding how it is calculated can save you thousands of dollars, especially if you’re on a tight budget.
If you want to understand the ins and outs of credit or are looking for ways to improve your credit score and your overall financial situation, you are in luck.
In this article, you’ll discover three things you need to know about credit scores so you can achieve better financial results.
Here are three important things you should know about credit scores.
What Is a Credit Score?
If you’ve ever wondered what exactly a credit score is or what can credit scores be used for, you’re not alone.
Many consumers have more questions than answers when it comes to credit.
In part, this is because there are all kinds of intricacies and minutiae associated with credit cards and credit scores.
For example, have you ever heard of an MCC code? A Merchant Category Code (MCC) is a number for businesses that accept credit card payments by the credit card networks (Visa, MasterCard, Discover, American Express). They are primarily used to denote the type of business or service being provided and to categorize, track or restrict purchases.
The point is that there is a lot to learn when it comes to credit. It pays to know which information is pertinent to your particular financial situation.
Your credit score (credit bureau risk score) is simply a numerical snapshot of your credit history.
Your score is based on information available through credit bureaus. It helps lenders and other businesses decide whether or not to loan you money or otherwise do business with you.
There are two primary credit scoring systems, the FICO score and VantageScore, established by the credit bureaus. The majority of lenders use FICO scores although there are other credit scoring systems.
- Equifax uses the BEACON scoring system (280-850).
- Experian uses the PLUS credit scoring system (ranges from 330-830).
- TransUnion uses the FICO scoring system (ranges from 300-850).
No matter which credit bureau you are using, the higher your credit score, the more favorable terms you’ll receive from lenders.
How Are Credit Scores Calculated?
Although there are multiple credit bureaus and scoring systems, your credit score is calculated the same way across the board. Yes, some lenders essentially utilize the same factors to arrive at your credit score.
If you’ve been wondering how credit scores are determined, you’re not alone. The average card holder has 3.5 credit cards and no idea how lenders decide what their credit score is.
Well, wonder no more. Here are the criteria that the credit bureaus use to assign you a credit score:
- Payment history
- Amounts Owed
- Length of credit history
- New Credit
- Types of Credit
Even though each bureau may assign different weighting to each factor, they all pull the information used to determine your credit score from your credit reports.
Why Is My Credit Score Important?
If you’ve ever wondered what can credit scores are such a big deal, here is some news.
Your credit score is an extremely important number. It can be the deciding factor as to whether you are approved for a mortgage or loan, receive insurance, and even affects your interest rates, activation fees, security deposits, and insurance rates.
In general, people with higher credit scores are more likely to repay their debts. If you have a good credit score, you’ll get the best rates and terms which will save you thousands of dollars. On the other hand, if your credit is poor, you may find it difficult to qualify for loans or credit cards
Credit cards and credit scores don’t have to be a mystery. Hopefully, this article has pointed you in the right direction and helped you understand what a credit score is and why it is important to you.