Outside of your Social Security number, your credit score might be the most important number associated with your identity. Your credit score is the key to unlocking the best things life can offer. With a good score, you have access to the best interest rates, saving you thousands over rates offered to people with lower scores. It's important to know your credit score and whether it's considered good in relation to the rest of the population.
Credit Score Basics
Your credit score is a snapshot of your credit profile at the specific moment your score is given. Your score is based on your credit report, which contains your entire credit history. This document includes the good and bad of your credit-related decisions, the latter of which stay on your credit report for seven years. Having a good credit score is important because the power of a good score is growing in significance; credit checks are now customary when trying to get an apartment or a new job.
Composition of a Credit Score
The main type of score used by creditors to determine your credit worthiness is the Fair Isaac Company score. The FICO score comprises five factors - in order from most to least important, these factors are your payment history, your amount of outstanding debt, the age of your credit accounts, the number of recent requests for credit you've made and the mix of different types of credit you have. A change in any of these factors would then result in a change in your credit score.
A Good Credit Score
The key to a good credit score is to have a history of on-time payments and a low utilization of credit. If you pay your bills on time and don't carry a balance on your credit cards, you'll have a good credit score. According to Bankrate.com, the median FICO score is 723, with 45 percent of customers having scores in the 700s. If your score is above 700, your score is considered very good and you should have no problem being approved for credit. A score in the high 600s should also get you credit approval; however, scores below 600 are considered poor and will result in either credit denial or a very high interest rate.
Types of Credit Scores
The FICO model is the most widely used and most commonly known credit score, but it's far from the only credit score. Each of the three main credit bureaus offer their own variations of the FICO score; these scores are similar to FICO scores, but are not identical due to weighing the parameters of the score differently. Also offered is the VantageScore, which was created by the credit bureaus to give a more standardized credit score. In the end, it doesn't matter which scoring model you use as long as you track that score over time and realize its limitations in relation to the FICO score. For example, the FICO score ranges from 300 to 850, while the VantageScore ranges from 501 to 990. Both scores are effective, provided you place your score in the proper perspective.