Understanding Credit Score: Complete Beginner’s Guide

Credit scores significantly impact various aspects of your life. Sometimes, a few points can help you get a better offer on a new loan. Therefore, understanding credit scores and maintaining good ratings is crucial. 

If you are dealing with a poor score and want to improve your financial standing, this guide is for you.
In this blog, you will learn how credit scores work, the factors affecting them, and how you can improve your creditworthiness.

Highlights:  * A credit score measures your creditworthiness numerically. * Credit scores are classified into five categories: poor, fair, good, very good, and excellent. * Higher credit scores may mean lower interest rates and more favorable credit terms.

What Is Credit Score?

A credit score is a numerical value ranging from 300 to 850 that represents your creditworthiness. It suggests your credit behavior based on your credit history and many other factors.

Creditors and lenders typically demand a credit check to gauge your repayment ability. When you apply for a loan or line of credit, it helps them determine your credit risk. As a result, if you have good credit, you may find it easier to obtain a mortgage, insurance, and other essential services.

But, bad credit can bring forth various challenges. For example, you may face difficulty obtaining personal or home loans. Even if you manage to get one, the interest rates are comparatively higher.

Just a few points can mean the difference between approval or rejection.

What Is Good Credit Score?

Good credit score ranges from 670-739, exact definition may vary depending on the credit scoring model. Every credit bureau calculates credit scores based on different models.

For example, FICO and VantageScore are the two of the most widely used models. Both use various factors and core principles that are similar, including a scoring range of 300 to 850.

Usually, credit scores range from poor to excellent. Within that range, scores are divided into different categories depending on the scoring model:

Credit score ranges for FICO®.  

FICO breaks credit scores down into five different categories:

Credit score ranges for VantageScore 4.0

There are four categories:

Depending on the credit bureau, the credit score ranges for these categories may change.

Generally, a score between the mid 600s and mid 700s is considered fair to good.

According to Experian, 61% of Americans fall into the fair-to-good credit score category. However, if you fall below 579, it is generally considered a poor credit score.

In this case, you can use a credit monitoring tool like CoolCredit to get credit report instantly. You also get AI-assisted suggestions for DIY credit repair.

What Factors Influence Your Credit Scores?

A credit check is always required whether you want to buy a house, start a business, or get a personal loan.

Here are the main factors that influence your score:

1. Payment History (35%)

Your payment history includes information like your active credit accounts, missed or late payments, and data related to debt collection. Hence, it helps creditors assess how likely you are to repay a loan on time.

2. Credit Utilization (30%)

The credit utilization rate is your debt-to-credit ratio, i.e., the amount you owe proportional to your total credit limit.

Most lenders and creditors assess your credit usage based on credit cards, mortgages, and other fixed loans you may have. So, the lower the ratio, the better.

A credit utilization rate of 30% or less is ideal.

3. Credit History (15%)

Lenders also look at both your oldest and newest credit accounts. Thus, the length of your credit history may affect your score. It means a good credit standing over the years can help boost your chances of getting approval.

4. Credit Mix (10%)

Credit mix includes the types of credit accounts you have, such as mortgages, car loans, credit cards, etc. Hence, a diverse credit mix maintained well over a long period reflects positively on your credit.

5. New Credit Accounts (10%)

Your recent credit activity is another factor that helps determine your credit scores. So, it is best to avoid applying for multiple loans until you have built a longer credit history. Otherwise, it can negatively impact your rating.

Conclusion

In conclusion, it's important to stay updated with your credit report to keep track of your credit score status. This way, you can immediately take action and maintain exceptional credit.

If you want to increase your creditworthiness, you may want to try an AI credit repair app. CoolCredit is an excellent AI-assisted platform for credit monitoring and identifying credit issues. You can use its ready-to-use dispute letter templates for self-credit repair.

FAQ's

Q: What is the highest credit score?

A: 850 is the highest credit score that a person can get. However, if you fall into the credit score range of 781-850 then it is considered excellent, which is the highest score category.

Q: How to check credit score?

A: You can submit a request to one of the major credit bureaus, or you can use apps like CoolCredit. It lets you check your credit scores across the three credit bureaus with just a few taps on your phone. This way, you won’t need to wait for 15 days to get your credit scores from the credit bureau.

Q: What to do if you have a poor credit score?

A: Many people know the basics of credit scores. Unfortunately, they often neglect to maintain it. What’s more, they only start working on improving it when they need a credit card or any type of loan.

However, understanding credit scoring factors can help you pinpoint the cause of a low or declining score. As a result, it can help you find what to work on to improve your scores.

Q: How to raise credit score? 

A: If you have a low credit score, here are some steps you can take to improve it:

• Always pay your credit card bill on time. 
• Maintain a good payment history. 
• Minimize your credit usage to maintain a lower credit utilization rate. 
• Regularly check your credit report and raise disputes for suspicious charges.

Furthermore, you can also use tools like Cool Credit to regularly monitor your credit report. It also provides actionable strategies to raise your score.