The major credit reporting companies Equifax, Experian and TransUnion collect data about your credit behavior. This data includes your payment history, loans, credit cards, credit card limits and the length of your credit history. It also includes any outstanding loans and balances.
Of course, every credit file is unique because everyone uses credit differently. And the factors that affect your individual credit score are completely different from what affects someone else’s credit score. As a result, everyone has their own unique accounts and history. Additionally, certain features of your credit profile are weighted more heavily than others, and this varies among all consumers with a credit history.
The moving parts of your credit score
The latest credit scoring model, known as VantageScore 3.0, looks at at least 900 different features of your credit. There are approximately 140 of these characteristics that play a major role in your final score.
Credit score developers have traditionally included an oversimplified pie chart to explain the impact of a person’s credit score. However, the actual characteristic weightings (such as making payments on time or late, or maintaining a high or low balance) tend to vary from person to person.
Here’s an example of how this happens: If you didn’t have any recently opened credit accounts, your payment history could carry more weight due to the lack of other information. On the other hand, if you have recently opened 10 credit accounts, your payment history may be weighted to a lesser extent as other information needs to be inspected.
What does a good free credit score mean?
Just as the information obtained to arrive at your final credit score is quite complex and varies from person to person, the definition of a good or bad credit score is also a complicated matter with many moving parts.
Credit score range
The FICO Score, VantageScore 3.0, and most other credit scores have a range from 301 to 850. For example:
- Excellent credit: 740 or higher
- Good credit: 700-739
- Fair credit: 650-699
- Bad credit: 600-649
- Bad credit: 599 or lower
However, these categories are still not set in stone. Lenders have their own categories and definitions of good and bad credit scores. This usually depends on how many borrowers a particular lender is willing to offer credit to. Those looking for a larger number of creditors will accept a lower credit score. At the same time, lenders who want to offer money to a smaller number of creditors will have higher requirements.
What is your score?
If you’ve always paid your bills on time (or not), don’t assume your free credit report score is good (or bad). To be sure, check your credit score. You can actually do this for free. Learning your credit score can also help you see what factors influence your score. This will ultimately help you improve it.
The benefits of an excellent credit score
You can borrow money for a car or house, or open a credit card with a lower interest rate if you have good credit. You’ll save money in the long run by paying less money over time. For example, if you buy a house for $300,000 and get a 30-year fixed mortgage, you will end up paying $90,000 more for that house over the life of your loan if you have bad credit! Although people with bad credit be able to can find specialist lenders who will give them slightly better rates.
Therefore, it is important to establish good credit or improve your credit score. Even if you already have an intuitive feeling about what your credit score is, it is very important to check it yourself before applying for a loan.
It is also crucial to note that the companies that create the credit score, such as FICO and VantageScore, do not decide which numbers are good or bad. It is lenders and insurers who give their own meaning to the scores.
When lenders obtain your credit score, they determine what rate to charge you for the loan. Insurance companies use the number to decide whether to offer you any kind of discount on your policy. If you have a lower credit score, some lenders may choose not to offer you credit at all.
Final thoughts
Keep in mind that there is no such thing as a bad credit score or a good credit score because the number itself means nothing until a lender decides how to use the number. A bad credit score is only bad if it prevents you from achieving something (buying a house, car, or opening a credit card) or causes you to pay more money over time in the form of higher interest.
Just like knowing your blood pressure, it’s important to know your numbers when it comes to your credit score. Doing so will help avoid the embarrassment of being rejected for a store credit card while at the checkout, for example. On the other hand, it can also save you a bundle because you know if you’re more likely to be charged a higher interest rate.
Photo credit: Match Financial
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