Why is a Credit Score Important?
When it comes the time to buy a house or a car, lenders will look at your credit score to determine if you are trustworthy and eligible to take out a loan to pay for that house or car. Lenders use credit scores to evaluate the probability that a person will pay back their loans on time.
A credit score can significantly affect your financial life. It is important to have a good credit score to get approved for loans when you are trying to buy any important asset such as a house, a car, or school.
YouNancial understands the importance of credit scores and aims to spread awareness about the topic by holding events and informational sessions with knowledgeable financial professionals and continue to educate our audience. Just last February, we had the opportunity to speak with Doron Noyman, VP of Sales and Development at Keypoint Credit Union about how maintaining a good credit score can build wealth.
YouNancial also offers an educational and FREE course that makes credit scores digestible and easy to understand.
Check out our course here: https://www.younancial.org/courses/unit-3-banking/
What is a Credit Score?
A credit score is a number between 300–850 that indicates how worthy a person is of getting a loan. The higher the score, the more attractive a a potential borrower looks to a lender. A credit score is based on a numerous amount of aspects such as credit history, number of open accounts, levels of debt, and repayment history.
The credit score model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions to determine a person’s own unique credit score. There are a number of ways to improve an individual’s score, including repaying loans on time and keeping debt low.
How Credit Scores Work
People with credit scores below 640, for example, are generally considered to be at high credit risk for a lender. This makes it difficult to obtain loans and the person is more likely to pay higher interest rates.
People with credit scores above 700 are generally considered good and may result in a borrower receiving a lower interest rate for a loan. While every creditor defines its own ranges for credit scores, the average FICO score range is often used:
Excellent: 800 to 850
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 300 to 579
How Credit Scores Are Calculated
Five factors that are considered when determining your credit score
Payment history
All early or late payments that are made
35% of your credit score
Total amount owed
Credit Utilization (How much credit you are using)
30% of your credit score
Length of credit history
Longer credit history is better for lenders because there is more data to determine payment history
15% of your credit score
Types of credit
Shows if a person has taken out car loans, mortgage loans, or using any credit cards
10% of your credit score
New credit
How many new accounts a person has
How many new accounts they have applied for (credit inquiries)
How many new accounts they have opened
10% of your credit score
How to Improve Your Credit Score
Pay back your credit on time
Usually due once every month
Make sure to pay back all bills by the due date
However if you are using more than 30% of your credit, it is best to pay as soon as possible, regardless of due date
Do not use more than 30% of your credit line
Do not spend more than you can afford
Do not close any credit card accounts
Can harm your credit utilization score if one of your accounts is closed