Why You Need to Know Your Credit Score

 

A great credit score is what most of us aspires to. After all, a credit score is one of the important determining factors when it comes to borrowing money – and getting a low-interest rate when you do. If you ever plan to buy a car, a house, open a credit card, start a business, etc. you need to understand what a credit score is, what your personal credit score(s) is, and how it affects your personal finances.

 

Credit Scores

 

But trying to pin down a specific number that means your credit score is “good” can be tricky. After all, there are lots of different credit scores that lenders use when trying to decide your “risk level” and whether to grant you a loan.

 

How Do You Rate?

 

Most credit scores – including the FICO score and VantageScore 3.0 – operate within the range of 300 to 850. Within that range, there are different categories, from bad to excellent. They generally look like this:

 

  • Excellent Credit: 750+
  • Good Credit: 700-749
  • Fair Credit: 650-699
  • Poor Credit: 600-649
  • Bad Credit: below 600

 

But this is just a general guideline, even these aren’t set in stone. That’s because lenders have their own definitions of what a good credit score is, or what kind of risk they are willing to take on. One lender might approve applicants with credit scores of 660 or higher. Another might be more selective and only approve applicants with scores of 740 or higher. Or a lender might offer credit to anyone with a score of at least 650, but then charge them with credit scores below 700 a much higher interest rate!

This is why knowing your score and working to make it “good” score come in!

 

The Credit Score Range Scale

 

There are many different credit scores available to lenders, and they each have developed their own credit score range. Why is this important? Because if you get your credit score, you need to know the credit score range you are looking at so you can understand where your number fits in.

Here are the credit score ranges used by major scoring models:

 

  • FICO Score range: 300-850
  • VantageScore 3.0 range: 300–850
  • VantageScore scale (versions 1.0 and 2.0): 501–990
  • Experian’s PLUS Score: 330-830
  • TransUnion New Account Score 2.0: 300-850
  • Equifax Credit Score: 280–850

 

With all the ranges listed above, the higher the number the lower the risk (meaning the lender sees you as a lower risk of defaulting). This means consumers with higher scores are more likely to get approved for credit and loans, and to get the best interest rates available when they do. They are also more likely to get discounts on insurance (for example: automobile insurance).

Even landlords will check your credit score as part of the application process when looking to rent a property.

 

What’s Your Score?

 

Don’t assume your score is good (or bad) just because you have always paid your bills on time (or maybe not.) The only way to know what your credit score is… is to check it. You can get your credit score free at CreditSesame.com. This is a truly free credit score – no payment information is requested.

Credit Sesame

Credit Sesame is an educational credit and personal finance website that provides consumers with free credit scores. No credit card or subscription is required to register or obtain your credit score, which is updated monthly.

As of April 2016, the company’s registered users have a combined $100 billion in loans, which Credit Sesame monitors and analyzes for potential savings on a daily basis. In addition, Credit Sesame has over 8 million user accounts.

 

Credit Sesame

 

What Can You Get With A Good Credit Score?

 

Some of the best credit cards — from rewards cards to 0% balance transfer offers —go to consumers with excellent credit scores.

Having a good credit score can also get you a lower interest rate when you borrow money. That means you will pay less money over time. For example, if you’re buying a $300,000 house with a 30-year fixed mortgage, and you have good credit, then you could end up paying $90,000 less for that house (over the life of the loan) than if you had bad credit. Why? Because a person with good credit will get a better, lower interest rate on a mortgage.

The same goes for financing cars as well.

So, in the end, it really pays to understand your credit scores and to make them as strong as possible. It will save you money now and down the road.

 

How Do You Get a Good Credit Score?

 

To ensure your credit stays “good” for the long-term, it can help to pick one credit score and monitor your progress over-time. The FICO score is my recommendation. It the most used and well-known.

It also helps to pay attention to whatever is being cited as a “risk factor” — for instance, the amount of debt you’re carrying is too high. Addressing whatever is weighing down your credit score will likely bolster all your scores. That’s because, while the exact credit score ranges may vary, most models are based on the same five categories:

 

  • Payment History (accounts for 35% of most scores)
  • Credit Utilization (accounts for 30% of most scores)
  • Length of Credit History (accounts for 15% of most scores)
  • Mix of Accounts (accounts for 10% of most scores)
  • New Credit Inquiries (accounts for 10% of most scores)

 

So, in order to build and maintain a good credit score, you’ll need to make all of your payments on time, keep the amount of debt you owe below at least 30% (but ideally below 10%) of your total credit limit(s), maintain credit accounts for the long haul, add a mix of accounts (installment loans vs. revolving loans) and manage how often you apply for new credit.

Companies like Credit Sesame can help you monitor your credit score, help improve your credit scores, analyze your finances for potential savings and monitor your accounts and notify you in case of potential identity theft. But what I like about Credit Sesame is that it offers these services for free!

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