Credit score is an essential part of everyone’s financial life. By definition, it refers to “a numerical rating representing the perceived ability of a person or organization to fulfill their financial commitments, based on an analysis of their credit history and current financial circumstances.” 

Credit score represents the responsibility for your financial life and the discipline to fulfill financial commitments. In this article, we will get to the root of credit score and understand this important notion.

Why You Should Care about Credit Score

So why should you vex yourself with the nitty-gritty of credit scores? To put it simply, you should care about your credit score because it influences various aspects of your daily life and financial future. 

With a decent credit score, you can leverage people’s trust in your ability to pay back the money you owe in time on many things in life – different types of loans, mortgages, insurance premiums, credit cards, house/apartment rents and cell phone plans etc. The higher your credit score, the better deal you can possibly get from all the matters mentioned above.

For example, if you have a higher credit score when applying for real estate loans, you’d likely be approved for a lower interest rate than otherwise, possibly saving fix to six figures.

Based on data from Informa Research Services, a person with FICO scores in the 620 range would pay $65,000 more on a $200,000 mortgage than someone with FICOs over 760. Your credit score makes a big difference.

What is a Good or Bad Credit Score

Now you understand that a good credit score will put you in a beneficial financial position. But what is a good or bad credit score?

First, there are two companies that dominate credit scoring – FICO score and VantageScore. Both companies score credit from 300 to 850. The higher the score, the better your credit is. 

Next, let’s take a look at what are considered “good or poor credit scores” for both companies based on Experian:

FICO Score: 

• Exceptional: 800-850
• Very Good: 740-799
• Good: 670-739
• Fair: 580-669
• Very Poor: 300-579

VantageScore:

• Excellent: 781-850
• Good: 661-780
• Fair: 601-660
• Poor: 500-600
• Very Poor: 300-499

If you are applying for a mortgage, for example, most lenders require a minimum credit score of 620 or higher, although some government-backed mortgages such as FHA loans typically have lower credit requirements. 

Of course, the higher the credit score, the lower the interest rates you are likely to get – a big incentive to maintain and boost your credit score.

Generally speaking, a “good credit score” is 670 and above for FICO score, 660 and above for VantageScore;“A bad credit score” is 580 and below for FICO score, 600 and below for Vantage Score. 

Factors Impacting Your Credit Score

There are typically 5 factors that play a role in impacting your credit score. Here are the big five and their weight in influencing the magic number:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

How these factors will exactly influence your credit score will depend on your unique credit report, so it is always a good idea to do a regular credit report check by yourself or hire credit monitoring services such as Experian and Credit Karma.

Whether you are planning to buy homes or taking out business loans, an excellent credit score is conducive to your financial health and your ability to leverage. In the next article, we will talk about how to build and boost your credit score in 2023. 

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