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Credit Scores 101: What Is a Credit Score and Why Does It Matter?

 What Is A Credit Score? 
A Credit score is a three-digit number used to determine your creditworthiness. It ranges from 300 to 850, the higher the better as you would be more likely to qualify for loans and better interest rates. It is based on your credit history, such as your ability to pay bills on time and debt. It is also known as a FICO score.

What Is A Good Score?
Credit scores are viewed in ranges, and may vary slightly based on the scoring model used but they are generally similar to the below: 

  • 300 - 579: Poor
  • 580 - 669: Fair
  • 670 - 739: Good
  • 740 - 799: Very Good
  • 800 - 750: Excellent
Lenders view a credit score of 700+ positively, which may result in lower interest rates. Higher rates usually mean you have demonstrated good credit behavior in the past, making potential lenders more comfortable.

How Is Credit Score Calculated?
There are 3 major credit reporting agencies in the US (Equifax, Experian, and TransUnion). These three consider a few factors when determining your credit score, such as: 

  • Your payment history: This includes late payments, charge-offs, etc... This is the most important part of your credit score as it determines 35% of the score.
  • The number of recent credit requests you've made: When you apply for credit too often in a short period, lenders might think you're desperate for credit. This can hurt your credit score. This accounts for 10% of your credit score.
  • The length of your credit history: This is how long you have been using credit for and shows your experience managing credit. It accounts for 15% of your credit score.
  • The amount owed: The amount you owe is a percentage of your available credit that you've used, It's called credit utilization. This is very important as it is responsible for 30% of your score.
  • Credit Mix: Using different types of credit, like car loans or credit cards, shows lenders that you can manage different kinds of debt. This can help your credit score. It is responsible for 10% of your score.
How To Improve Your Credit Score?
  • Paying all bills on time: This includes credit repayments, utilities, and other bills.
  • Minimize borrowing: Stay below your credit limit and keep debt low.
  • Aim for longer credit history: The longer your credit account is open, the better it is for your score. 
Bottom Line: 

Your credit score is an important factor in your financial future. It shows how reliable you are with managing debt and can help you get better loan deals. To boost your score, pay bills on time, keep your debt low, and build a longer credit history. Good Luck!

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