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Understanding Credit Scores: What is a Credit Score and How Does it Work?

Understanding Credit Scores: What is a Credit Score and How Does it Work?

Credit score

Your credit score, sometimes known as your FICO score, tells banks and other financial institutions a great deal about you. Based on your credit score, a bank may or may not decide to give you a loan. A credit card company may choose to offer you a card, or they might not if your score is too low. Your score will also be the determining factor in whether a landlord might let you rent a house or an apartment. It can come into play when are trying to buy a car as well. But what exactly is a credit score, and how do you get one? If you’re interested in the subject you can read more here, but here is a simple explanation for you.

The Basics

A credit score is generated by an algorithm that takes all kinds of things into account. Some of these include how many credit cards you have, and whether you pay all of them off on time, or whether you carry a balance on some of them from month to month. Your borrowing history is the most significant determining factor when it comes to formulating your FICO score. The reason that it exists is so banks and other lending institutions know how much of a risk you’ll be if they decide to lend you money. If they feel like you’re probably going to default on a loan, they’re not likely to give it to you.

Credit Bureaus

There are three major credit bureaus, and they are Equifax, TransUnion, and Experian. Your credit score with these three is probably going to be similar, but not identical for each one, as they each use a different algorithm. Scores range from a low end of 300 to a high end of 850, which is considered a perfect score. A perfect score of 850 is almost impossible to get, but if you have anything approaching 800, then you are doing very well for yourself. A score close to 800 means that nearly any bank is going to feel comfortable giving you a loan.

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Determining Your Score

When you get your score from any of these credit bureaus, you’re going to be looking at an aggregate of your payment history, current debt, new credit, length of credit, and types of credit. If you have been fiscally responsible, paying back previous loans on time, not maxing out your credit cards, and never having declared bankruptcy, then your score should be good, and you should have a lot of flexibility with your borrowing options. If you practice responsible spending habits, then you should be able to maintain a high credit score, which is useful, because you never know when it is going to come in handy. You might decide at some juncture that you want to trade in your old car for a new one, that you want to get a mortgage on a house, or that you want to take out a loan to pay for a wedding, or some other reason. If you maintain a good credit score, then you will be ready for anything that life throws at you, and you can feel confident and secure.

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