What is a credit score?
Your credit score is a single three-digit number which tells lenders how creditworthy you are; or, simply, how likely you are to repay the debt. Scores range from 300 to 850. Within this range are categories, as follows:
- below 600 - bad credit
- 600-649 - poor credit
- 650-699 - fair credit
- 700-749 - good credit
- 750+ - excellent credit
Personally I think the words used to describe each category ("poor," "fair," "good") are finely tuned to keep the average person from feeling too good about their score. Just a personal nitpick I have. Also, be aware that there are slightly different credit scales depending on the credit bureau.
Creditors will extend credit with certain terms based on your score. The better the score, obviously the better the terms.
Get to know your credit score.
Your credit score takes into account six main factors:
1. Credit Utilization Ratio: this is the percentage of credit you are using of the entire amount available to you. It only applies to revolving credit, not installment loans (like school, personal, or mortgage loans), so essentially, it applies to your credit cards.
2. Payment History: quite simply, have you paid all your debts on time? Even one missed payment can really drag your score down, because this is in some ways the most important factor to a lender - will they pay me back or not?
3. Derogatory Marks: this is the serious stuff like collections, foreclosures, defaults, and bankruptcies.
