Illustration: Chelsea Miller

Credit Scores

Even if you're financially responsible, life's unpredictable nature can sometimes catch you off guard, at times making it dangerously easy to fall into debt.

Your credit score, also called a FICO score, is an actual number, between 300 and 850. The higher the number, the better: a score of 740 to 799 is considered very good, though the average is closer to 700. FICO is an acronym for Fair Isaac & Co., the company that is responsible for tabulating your credit score.

Each of the three main credit agencies – Experian, Equifax, and TransUnion - have a score for you based on your credit report at that individual agency. Each agency has more than 200 million files on people who have a credit history because they have used credit, and 4.5 billion are updated in those files every month. The agencies tend to have different information on the people they track, which means your credit report and score will vary from agency to agency.

Those scores are what potential creditors, landlords, employers and insurers look at for an instant judgement on your creditworthiness.

That’s important because lenders believe that people who are creditworthy will pay back what they owe. That’s why better credit reports and higher credit scores make it easier, and cheaper, to borrow. It also makes it easier to rent an apartment or buy a house, get a job, buy insurance, and a number of other day-to-day essentials.

Illustration: Cristi Cash

Sources of Data

Credit scores are the result of a compilation of several different sources of data that are available in your credit report. That data falls into five distinct categories, which are listed in order of how much weight they usually have in informing your score:

  • Payment history
  • Amounts owed
  • Length of credit history
  • Types of credit used

You’ve heard before that paying credit card bills on time is crucial – and the list above is why. Your payment history – if you pay on time, if you pay in full or only the minimum balance, and if you have late or missed payments – is the single most important factor in determining your credit score.

Avoiding a Bad Score

There are two ways to have a bad credit score. The first, not surprisingly, is by not using credit wisely. That means spending more than you can afford, not paying your bills on time, and having too much outstanding credit, often spread across multiple credit card accounts.

The second is not as intuitive but is still a factor: you can have a bad credit score if you don’t use credit at all. You have to actually use credit to have a good credit score. So simply cutting up your credit cards, or never having a credit card account, isn’t the path to a high credit score.

What Doesn't Count

One important thing to know about credit scores is that the information is limited to how you use credit – there is no information about your race, religion, medical history, or lifestyle. There’s not even any data on your checking and savings accounts or your investment accounts. It’s all about how you use credit.

Disclaimer
While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.

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