Credit scores have the ability to drastically affect your ability to secure loans or rental homes, open utility accounts, set up cellphone service plans and more. Therefore, it’s vitally important that you monitor and make timely payments on your credit score in order to stay eligible.
An outstanding credit score is essential to qualifying for cards with attractive perks and lower interest rates, but what exactly constitutes an exceptional one?
What is a credit score?
Credit scores are three-digit numbers (generally between 300 and 850), which represent an individual’s creditworthiness. They’re determined by information contained within their credit report such as payment history, debt amounts owed and length of credit history.
Credit scores are used by lenders to help determine whether someone is eligible for loans or credit cards and, if so, at what interest rate they should be granted them. They also help assess an individual’s likelihood of repaying debt on time – the FICO and VantageScore scoring models being two widely utilized ones.
There are multiple factors that determine your credit score, with repayment history making up 35%. A poor repayment history will reduce your score significantly.
Your debt compared to the total limits on your credit cards is another important factor affecting your score, with ideal debt levels being below 30% of each card limit. Furthermore, lengthening your credit history tends to raise scores as it shows you have experience handling different debt products.
Your credit application history also impacts your score. Too many new applications for credit can appear suspicious and lower your score; to protect yourself from this scenario, only apply for it when necessary.
As most people believe, most have one and only one credit score; in reality, many may actually possess several. Lenders use different models when it comes to credit scoring models and factors when calculating your score; each lender may consider different aspects when doing their calculations based on data provided from Experian, Equifax and TransUnion consumer reporting agencies – each using slightly different versions of FICO credit scoring when creating your scores.
How is a credit score calculated?
Credit scores are three-digit numbers used by lenders to predict your likelihood of paying back what you borrow, using information in your credit report. Your score helps lenders assess whether it’s likely that you will repay what they lent, as well as helping determine your eligibility for loan or card applications, as well as interest rate determination. It takes many different factors into consideration in calculating credit scores; most important among them are payment history and utilization; it is calculated by credit bureaus regularly as more information becomes available and updated into your report.
Credit reports provide the most accurate picture of your financial standing. Each major bureau (TransUnion, Experian and Equifax) allows you to request one free report every 12 months.
Your credit score is determined by the information in your credit report, which is continually updated as you take out loans and repay credit cards. Your report includes payment history, amounts owed, mix of accounts used and length of history.
Accurate credit scores must reflect the most up-to-date data in your report. That is why, at any given moment, your score could change slightly; new information such as late loan or credit card payments is updated when possible.
Payment history accounts for 35% of your credit score. The credit bureau analyzes payments made towards all consumer debts–such as credit card balances, auto loans and mortgages–as well as any public records like bankruptcy and judgments that might appear on public record. They also take into consideration how long you’ve been behind on payments as well as their severity.
Amounts Owed comprises 30% of your credit score and measures the ratio between outstanding debt you owe and available credit on your accounts. Lower credit utilization equals higher scores; 10% is allocated towards taking into account what type of accounts are open: revolving or installment (such as auto and mortgage loans) accounts – lenders prefer seeing that borrowers possess both types of accounts to ensure an ideal mix.
What is a credit score range?
Credit scores are used by lenders to evaluate your creditworthiness and asses your ability to repay loans. They’re calculated based on information in your credit report that includes current and past activity; both FICO and VantageScore credit scores range between 300 to 850 with 850 being the optimal score; score ranges can also be divided into bad/poor, fair/average and good categories.
Holding onto a high credit score can increase your chances of getting approved for new accounts, and help secure better terms and interest rates. In some states, credit is even considered when applying for car and home insurance policies.
When your FICO or VantageScore credit score falls within the excellent/exceptional range, this indicates your financial history shows you’re responsible and likely to repay debts on time. Borrowers in this category typically possess scores exceeding 780 and can look forward to being offered more favorable lending terms and rates from lenders.
Borrowers with scores in the good range typically fall between 670 and 739, indicating an above-average credit history that should enable them to secure credit cards and loans, though not necessarily with optimal interest rates.
Fair credit ratings indicate you may have below-average credit, making lenders wary. Navigating this category may prove challenging and may make securing new forms of finance such as mortgage loans more difficult.
An individual with poor credit can find it even harder to manage, as this indicates a greater likelihood of default on debts or insufficient payments. Lenders tend to approve new credit applications more slowly for people in this category and they often must pay much higher interest rates compared to people in good or fair credit categories. Poor credit can make finding employment and housing/car loans harder, making best practices such as paying bills on time or decreasing outstanding debt even more important for maintaining your status as an effective manager of finances.
What is a credit score tier?
When lenders assess your application for loans, credit cards or other financial products, they often evaluate your creditworthiness using a score tier system. This score tier determines how likely it is that you will be approved and whether you qualify for favorable terms and interest rates with each lender.
Tier one credit means making payments on time and having few or no balances on revolving accounts like credit cards, with long credit histories and an array of accounts listed on their reports. Due to this outstanding profile, these borrowers benefit from preferential financing terms including lower interest rates.
Tier two scores, on the other hand, are often considered good credit scores. Individuals who possess these scores qualify for various loans and credit products while often being subject to higher-than-average interest rates due to lenders viewing them as being less risky and more responsible. Lenders therefore tend to charge these borrowers higher interest rates than they might charge other borrowers with different scores.
Tier three credit scores are classified as fair or poor credit ratings. People with these scores typically experience difficult approval processes and limited lending options; it may be challenging for them to obtain new loans and even maintain existing accounts; paying bills on time may become problematic and savings by decreasing debt utilization ratio (the amount used compared with available credit) may prove challenging.
Not to be underestimated is that different lenders will each set their own criteria for what defines an exceptional credit score. Some might only consider those with scores over 800 to be part of Tier One while other lenders could set it lower at 720.
No matter the criteria involved, there are general guidelines you can follow to improve your credit tier. First step should be ensuring all credit reports contain accurate data and that only part of what’s available to you is being utilized; you could also increase total credit limits (if possible) and reduce debt across accounts.
