What is a Credit Score?

Banks Editorial Team · November 1, 2018

Have you ever wondered what an average credit score is? Or what is a credit score? Do you know why having a healthy credit score is important? If so, you’re not alone – a 2017 study found that many Americans are unsure of what a good credit score is, or why credit scores are important. To put it simply, your credit score is a numerical representation of your trustworthiness when it comes to repaying debts. They range from 300 (the worst) to 850 (the best), and while different creditors may have higher or lower standards, anything from 650-699 is considered average (or ‘fair’), with scores 700 and up considered good or excellent. You can build your credit score in a variety of ways, and your score will come into play whenever you need to open a line of credit, whether it’s for a major purchase or for a new credit card.

What Is a Credit Score?

Your credit score is shaped primarily by five factors. First is your payment history, which shows your diligence in repaying debts on time and accounts for roughly 35-40% of your credit score. Second your total amount owed, which takes into account both the amount of money you’re currently borrowing, as well as the percentage of available credit you’re using (known as ‘credit utilization.’ This factor makes up roughly 20-30% of your credit score. Third is the length of your credit history, with a longer history reflecting more favorably on your creditworthiness and resulting in a higher credit score. This factor makes up roughly 15-21% of your credit score.

Fourth is your ‘credit mix,’ or the different types of credit you’ve taken throughout your life. For example, car loans or mortgages are considered ‘installment credit,’ whereas credit cards are considered ‘revolving credit.’ More types of credit result in higher scores. This factor makes up about 10% of your credit score. Finally, ‘new credit’ or ‘credit inquiries’ – the number of new credit lines you have, the number of credit lines you’ve applied for recently that have required a creditor to check your score, etc. – also play a role in determining your credit score, and are responsible for about 10% of your overall score. To maintain an average or above-average credit score, you will need to ensure that you maintain these factors by doing things like paying bills on time, keeping your credit utilization at a reasonable level (about 20% is good), and having a healthy credit mix.

 

 

What is an Average Credit Score?

Experian, one of the major credit reporting agencies, says that most individuals’ credit scores fall somewhere between 600 and 750 (remember, the scale ranges from 300 to 850). However, that doesn’t mean that every score in that range is ‘average’ or good. In fact, scores between 649 and 550 are often considered poor. Scores between 650 and 699 are generally considered ‘fair,’ with scores between 700 and 749 considered good and 750 and above considered excellent. You should note, however, that different creditors may apply varying standards: for example, one creditor may consider a credit score of 720 merely ‘good’ while another could consider it excellent.

You may be wondering why you should care about credit scores. Your credit score can come into play in a variety of circumstances. The most common is when you seek to borrow money. This could include a mortgage on a home, financing for your car, or opening up a new line of credit for a credit card. Insurers also check your credit score to help determine if they will cover you, and the rates they charge you, although they used slightly modified credit scores called ‘insurance scores.’ Potential employers may ask for your credit score in some cases, although they can’t get it without your permission. Similarly, you may be asked to provide a credit score in certain renting situations, or to get utilities like electricity. If you have a below-average credit score, or if you don’t have one due to minimal credit history, or if you simply choose not to provide it, you may be asked to provide a larger security deposit.

 

 

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