October 7, 2022

What is a Credit Score?

Understanding how the financing world works is very tricky, but once you actually get it, everything becomes easier. 

The U.S system works by a logic of loyalty and risk taking. 

Let’s compare it with our group of friends. We all know who to call in case we have a party, who to call to have an honest conversation and who to call in case we have an emergency. If someone asks us to borrow some money, we know who will pay us back in time and who probably won’t. 

Credit Score works kind of the same way. On a scale from 300 to 850 you get more points or less points depending on how you are managing your accounts and paying on time for the services you contract. 

There are 3 credit report bureaus Experian, Transunion and Equifax that will give you access to your score once a year. You’re entitled for a FREE credit report each year, which you can request at annualcreditreport.com

To get access to a Credit Score any company needs just 3 out of these 4 inputs and your consent:

1. Social security number (SSN) 

2. Your Full Name 

3. Your Address 

4. Your date of birth

Why does having a credit score matter? 

You usually need it if you are planning on renting an apartment, setting up utilities (electricity, water, gas, internet, telephone), buying a car or leasing it, starting the business of your dreams, getting a higher education, etc. The way it works is that banks and other companies that will lend you money use your Credit Score when you apply for any loan (mortgage, business, line of credit, student loan, car loan.) When the credit score is good, you’ll get access to a loan with lower rates. Also, this often determines how much you pay for insurance.

Wondering how to improve your score? 

These are the 5 factors that determine it: 

1. Payment history (35% of the score) - If you’ve been responsible in the past, that’s most likely to be repeated in the future. They will check all of your bills to know if you paid on time, even if it is just the minimum.

2. Amount Owed (30%) - You should be able to show you can manage a reasonable amount of debt. Just don’t get too close to your limit, because creditors may think you’re supplementing your income with credit.

3. Length of your credit history (15 %) - In terms of credit score, if you’ve been borrowing for a long time it means you are loyal and responsible.

4. Credit Type (10%) - If you have various sources of credit it proves you have experience handling different account types.

5. New credit. (10%) -  It is good to have new credit but it is also important that you take on credit that you actually need. So if they check what you’ve been up to lately and see that you’re applying to too much credit (such as too many credit cards at department stores or so) those moves will be seen as a high risk. Remember, they want to know who gave you credit, when and how much. So when you apply for new credit just remember that it is another account you have to be very careful with.

So let’s recap. The Credit Score is a number that represents an average of your Credit Score History. Any company or bank that will invest in lending you money or giving you a service will first check your credit score (for that they only need 3 out of 4 data about you). This analysis will help prospector vendors determine how likely you are to pay your debts. Therefore, that also determines what kind of loans and insurance you can get. There are 5 factors that will help you keep a good score or improve the one you already got, and you just read all about it.