Everything you need to know about credit scores in the United States
Having a good credit score comes with several benefits and can save you money. Here everything you need to know about credit scores in the United States.
Having a good credit score has several advantages. Your credit score is a crucial indicator of how your credit history stands and can affect your ability to qualify for lower interest rates on credit cards and loans. We explain what it consists of and how it works.
Everything you need to know about credit scores in the United States
What is a credit score?
A credit score is a three-digit number that provides a snapshot of your creditworthiness. This has the main purpose of indicating the probability that you will repay a loan on time. That is why lenders or financial institutions use them to help estimate the risk of giving a person a loan or credit card.
In addition to determining the probability that you will repay a loan. Your credit score also influences how much you can borrow, how many months you have to pay, and what the interest rate will be. In the United States, the most popular credit score is FICO.
How does the credit score work?
According to the my FICO portal, credit scores are based on information from credit reports. Generally speaking, it’s like a summary of a person’s credit report. It measures how long you’ve had credit, how much credit you have, how much of your available credit is being used, and whether you’ve paid on time.
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In the case of FICO credit scores, they are calculated using various pieces of information from your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).
The information on each credit report changes all the time, so your credit score is updated frequently, too.
This is what a good and bad credit score looks like
While each lender determines whether your credit score is good or bad, they generally consider scores above 670 to indicate good credit. These are the generally recognized score ranges:
- Poor (less than 580): This score is below 580. well below the average score for US consumers and indicates a risky borrower.
- Fair (580-669): This score is slightly below average score, although some lenders may approve loans with this score.
- Good (670-739): This score is close to average or slightly above average, so it is considered a good score.
- Very Good (740-799): This score is above average, indicating a very reliable borrower.
- Exceptional (800+): This score is in the highest range, well above average score, indicating an exceptional borrower.