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Credit Scores

Understanding Credit Scores

A credit score is a number that typically ranges from 300-850 that is used to determine your credit worthiness and credit risk. These scores are calculated by credit agencies and used by lenders to decide whether or not they should offer you loans or issue you credit.

Credit score calculations are based on things like:

  • Payment history
  • Total debt
  • Length of credit history (how long you have had credit for)
  • Types of credit used

The higher your number, the better your score is. With a higher credit score, lenders are less likely to view you as a financial risk, which means you may qualify for better loan and credit terms. That’s why it’s important to be aware of your credit score and take steps to improve or maintain it.

The Impact of Your Credit Score

Having a good credit score can help you accomplish goals like getting a student loan*, buying a car, and even renting an apartment or buying a home. If your score is high, you have a higher chance of being approved and may lead to lower interest rates. While a lower credit score might result in being denied a new loan, credit card, rental application, and even a mortgage.

Your credit score is the gateway to being approved for credit cards or increasing credit limits, obtaining new loans, and lower interest rates. Make sure to monitor your credit and work on improving or maintaining your credit score for the best credit opportunities. Remember to use your lines of credit wisely. For example, a good credit card practice is to avoid using the full amount of credit available to you. Making payments on time will also help build and maintain your credit score.

* Federal Direct Subsidized and Unsubsidized Loan eligibility is not based on credit scores. However, subsidized and unsubsidized loan debt, payment history, etc. does affect your credit score.

Credit Score Calculations

Credit agencies calculate scores using factors such as:

  • Your outstanding balances owed
  • Your total credit limit and how much your owed balance represents of that total
  • The length of your credit history (how far back it goes)
  • Your payment history and how much of that history was paid on time
  • Recent credit inquiries (such as an application for a new line of credit)
  • The types of credit accounts you have open (credit cards, loans, etc.) in your name

Each factor varies on the impact it has on your credit score, but the overall ending number will determine what you qualify for.

Monitoring Your Credit Score

Monitoring your credit score is an important part of maintaining and/or improving your score. You can do this by reviewing a credit report which can be accessed online through the three national credit reporting agencies: TransUnion, Equifax, and Experian.

These agencies provide free annual credit reports that include a variety of information including personal information and a breakdown of your credit use. Reports will show your history of finances including any tax liens, repossessions, closed accounts, bankruptcy, delinquent payments, etc.

The credit reporting agencies use the information from your credit report to determine your credit score. Understanding what is on your credit report, how to manage your credit, and monitoring your credit activity will help position yourself for a better financial future.