Credit Score 101: Your Guide to Understanding Credit Scores
We’ve created this guide to help you understand credit scores and how lenders use these scores to make credit decisions.
Are Credit Scores Still Important?Though a recent Credit Score Literacy And Building Credit Report, from PYMNTS and Elan, shows that some larger banks are considering using non-traditional credit score models, these pilot programs are still in their infancy. Consumers still need to be aware of their credit score and what this says to lenders about their creditworthiness.
Since a credit score tells a lender how likely you are to pay back a loan, your score can make the difference between a favorable interest rate or not.
What is Considered a Good Credit Score?If you polled your friends and family, chances are you would get a wide range of answers on what is considered a good credit score. According to the PYMNTS and Elan report, 70 percent of surveyed consumers think their credit scores are “above average,” however only 45 percent have an above-average score. On the flip side, 8 percent of consumers believe their credit scores are “below average,” even though 21 percent indeed have below-average scores.
Adding to the confusion is the fact that there are various scoring models used by lenders. The scoring model used by 90 percent of top lenders, is the FICO® Score. Using the FICO system, a score between 670 and 739 is generally considered good, though it is important to remember that lenders set their own ranges and determine for themselves what is an acceptable score and other factors are considered in credit decisions.
myFICO.com has published the following table to provide consumers a general idea of how lenders perceive scores.
|FICO Score Range||Rating|
|Less than 580||Poor – well below the average score of U.S. consumers|
|580-669||Fair – below the average score of U.S. consumers|
|670-739||Good – slightly above the average score of U.S. consumers|
|740-799||Very good – above the average score of U.S. consumers|
|800+||Exceptional – well above the average score of U.S. consumers|
Much of your financial history makes up your credit report, which, in turn, feeds your credit score.
How are Credit Scores Calculated?
Information used to calculate a credit score includes:
- Payment history
- Outstanding balances
- Length of credit history
- Applications for new credit accounts
- Types of credit accounts (mortgages, car loans, credit cards)
What are the Benefits of a Good Credit Score?A healthy credit score can help you when financing a new home or purchasing insurance. Here are some specific ways a good credit score helps improve your financial outlook.
- Qualify for lower interest rates - Those with good credit are often eligible for lower rates on loans such as home, auto, and boat loans.
- Easier to rent - A potential landlord with an in-demand property will often check credit when selecting a renter. Even when there is not competition for the property, those with lower credit scores may end up paying a higher security deposit or needing a co-signer on the lease.
- Avoid utility deposits - Many utility providers require an initial deposit when you sign-up for services such as water, sewage, and electricity. If you have good credit history, you may be able to avoid this payment, saving you money during the moving process.
- Qualify for a better credit card - Are you looking for a credit card with a low rate plus rewards? A good credit score is one way to become eligible for these perks.
- Save money on insurance - Some insurance companies factor credit scores into monthly premium costs for car, renter or homeowner policies. Credit scores may not affect your ability to insure your property, but a good score could help you land a budget-friendly premium.
How do I Improve My Credit Score?The PYMNTS and Elan report finds that 62 percent of people surveyed want to improve their credit scores. Even if you have a higher score, you may not know how to keep it in the good or excellent range.
In general, paying bills on time, keeping on eye on credit card balances and using new lines of credit wisely are tools to push your credit score in the right direction.
Read more on how to improve your credit score.
SouthState can help you find the right loan for your financial situation, whether you’re car shopping, moving into a new home or need a personal loan.
About the Author, Holly Manafo: Holly Manafo, Myrtle Beach Grissom branch manager, has been with SouthState since 2009. She completed training through Leadership Grand Strand and is active in her community by volunteering at New Directions.