WTFinance: What is a Credit Score? [Video]
Thinking about buying a house? That new car you’ve be dreaming about? Opening that coffee shop/bookstore/record store that maybe also sells sandwiches? Having big dreams may also require good credit. To keep your eye on the prize, you need to keep an eye on your credit score, and we’re here to help.
Why your credit score matters
For starters, your credit score is the number that alerts bankers and lenders of how reliable you are when it comes to repaying debt. This score is calculated from things like if you pay your credit card on time, your credit card utilization and how long you have been using credit, or your credit history. Your credit rating is a slightly different story. This number is an assessment of the risk you pose to debtors and is used to estimate if you’re a good candidate for a loan — your credit score is part of this assessment.
Your credit score will be important during some pretty big life events. Such as buying a house, renting an apartment or getting a new car, whether you finance it or lease it. Many people don’t think about their score until it’s actually needed, which could lead to an unpleasant surprise. Your score could be a determining factor in not qualifying for a mortgage or car loan or missing out on that amazing apartment. Many times, you might still be approved with a lower score, but be required to put down a larger deposit, miss out on a great deal or pay more interest.
It’s important to remember, your score in no way defines you. It is just gives lenders an indication if they are taking on a big risk in loaning you the money. Unfortunately, a lower score tends to give the lender the upper hand in the transaction.
What is a good credit score?
So now you know what a credit score is and why it’s important, but what is considered a “good” score? What are you aiming for? Simply put, the higher your score, the better your rating. You want a big number! Scores range from 300 to 850. But from here on out, it can get a little confusing.
There are actually two types of credit scores lenders use: Vantage 3.0 (also known as the consumer score) and FICO. The score range for both remains the same (300 to 850), and the information they use to create the score is pretty much the same as well (some variances in language), but the weight they give the criteria is different. This may result in a different score when you check both.
Vantage 3.0 is the score used by the three major credit bureaus: TransUnion, Experian and Equifax. According to TransUnion, you’ll hit the “excellent” mark at 781 and a “good” score is 720-780. If you check your score and find out it’s below a 720, this will mean you might have difficulty getting a loan or approved in a competitive rental market.
How Can You Improve Your Score?
This score takes many factors into account, and the good news is that you can positively impact its improvement – so don’t be too discouraged. Start with monitoring your score and knowing the components that are within your control.
For example, are you carrying a balance on your credit card every month (also known as: revolving debt)? Lowering this amount or getting it to $0 is one of the best ways to lower your score.
Did you finally pay off that credit card that has been plaguing you with revolving debt for years?? Before you say, “Sianara!” for good, think about how closing that card may impact your score. Creditors want to know you have been in the financial management game for a while, and closing the account means it may not be visible on your report for them to see. It may be in your best interest to leave this account open, and lock the card itself away (you know the old adage… old habits…). Another thing, be aware when you are giving permission to pull your score – is it a hard inquiry or a soft inquiry? Hard inquiries will appear on your credit report and can negatively impact your score. A soft inquiry will not. Evaluate whether this situation is important enough that a hard inquiry is necessary.
What should I know about my credit score?
We know this stuff can get tricky sometimes, so we took the streets of Indianapolis, IN to talk credit scores. Check out Mint’s own Ashwin Khurana kicking of our WTFinance video series in the Midwest and learn three easy ways to impact your credit score and … life the life you want!