Not the easiest financial subject to understand, and yet one of the most important, is credit scores. What may seem like just a simple 3-digit number houses so much information and history that it singlehandedly can make your loan the best deal you’ve ever gotten. Or it could prevent you from getting the loan altogether.
Credit scores may seem random and an arbitrary system based on happenstance and coincidence. But there are ways to understand credit scores and why they work the way they do. Want to know how? Then, with MaxCash’s help, let’s get started.
How your Credit Score is Created
Credit scores don’t just come out of nowhere, but how are they determined? Your credit score is calculated based on a similarly named document known as your credit report.
A credit report is a document listing of all your credit history, made up of five different categories. Each of these 5 categories is given a percentage weight towards your credit history, and each covers a different part of being responsible with credit.
The five criteria your credit report covers are:
- History – How consistently you’ve been able to pay back your bills and loans in the past is important. This is the most important category when it comes to getting a new loan, and as a result, makes up 35% of your score. Missing a payment will significantly damage your score, but the damage isn’t permanent. Over time, missed payments will slowly repair.
- Present Debt – Current, present debt is the second largest chunk of your credit score, and thankfully, also the easiest to alter. This score is simply based off your current debt. The more outstanding loans or credit card charges you have, the lower this part of your score will be. However, your score will improve when you’ve paid off those debts. Paying off your credit cards and loans before making a new loan inquiry is a good idea.
- Duration of Credit – This is the simplest category to understand, but the hardest to actually influence. This category measures how long you’ve been using credit. If you’re just starting out with credit, this score will be lower. But the longer you use credit and borrow funds, the higher this score will go.
- New Credit – This category is one that can be tricky to understand. This category is determined by how recent your last loan was. If you’ve recently finished paying off a loan, this score will be higher. If your last loan was ages ago, this category will be lower. However, taking out a bunch of loans just for the sake of boosting this score will knock down your score as well. Thankfully, this part is only worth 10%, so pay your loans off regularly and this category should handle itself.
- Multiple Credit Types – The different types of credit you have experience with. Having only experience with credit cards could mean you wouldn’t know how to deal with a home loan, life insurance, or another type of financial responsibility. Having a varied portfolio of credit types will give you more points here in this final 10% chunk.
So now that you know how credit scores are calculated, hopefully the idea of what they represent makes more sense. Those 3-digit numbers are a stand-in for your entire credit history, showing lenders just how trustworthy you can be with borrowed money.
But how do you know which credit scores are good and which aren’t?
Which Scores are Good and Which Aren’t
There is a list of tiers upon which credit scores are ranked. This list ranges from the lowest score of 300, all the way up to 850, the best. But within that 550-point range, there’s a bit more nuance.
In fact, the credit score rating you generally want to maintain might be higher than you think.
- Above 720 – Any score above 720 is generally the level you want to aim for. It’s the credit score level where the best financial deals are made, and that the most experienced credit vets have.
- 680 to 720 – A score ranging between 680 to 720 is the next category, which is still considered very good. 682 is the average credit score, so if you’re at this level, feel free to pat yourself on the back.
- 620 to 680 – A score ranging from 620 to 680 is the next level down. This section is considered good, with decent financial deals available to those who land in this area.
- Below 620 – Unfortunately, this is the worst category to be in. Dropping below a score of 620 officially gets you categorized as a credit risk, meaning lenders will start denying you loans and giving you less than good deals. If you end up in this category, you might want to look into improvement plans before doing any borrowing.
And there you have it: a breakdown of which credit scores are good, average, and bad. With all this in mind, it may seem like a credit score below 620 is the end of the world. But this is far from true!
In fact, MaxCash offers programs that accept people of all kinds of credit levels. Interested? Then contact us at MaxCash now to find out more!