If you have been told you have “no credit” or “bad credit,” or even just that your credit score could be higher, you probably are wondering exactly what that means.
This guide will explain what credit scores are, how how they are determined and checked, and how you can take steps to improve yours.
When a borrower goes to apply for a mortgage or another type of loan, his or her credit score will be checked and assessed by the lender. If the score does not meet a certain minimum, the customer will likely be turned down. If a loan is extended in spite of bad credit, it will usually be with a higher interest rate and stricter terms.
Because your credit score can have such a broad-reaching effect on your financial life, it is something which should not be left to chance. Take proactive steps to regularly monitor your reports and your score.
Once you have established credit, pay your bills on time and manage your accounts with care. That way when you need it, you will have the high credit required to qualify for the best rates, cards, and financing opportunities.
Technically, the phrase “credit score” is somewhat vague. There are multiple scoring systems used to establish creditworthiness. If you live in the US, the primary system which is most relevant to you is the FICO credit system.
A FICO score is comprised of the following reported data:
Whether a customer has “good” or “bad” credit or so forth depends on what range his or her credit score falls into. The table below contains the credit score ranges.
|Type of Credit||Ranges|
|Poor (a.k.a. “bad”)||Under 630|
What about borrowers with no credit? Concerning risk, a borrower with no established credit will generally be treated as if he or she is as risky as someone with a “poor” rating — or even worse. There is an exception for young people. It is much easier to qualify for your first credit card in college than it is after graduating.
You may have heard people talk about your “credit rating” along with your “credit score”. Is a credit rating the same as a credit score, or are these two different things?
Your credit score and credit rating are not identical. Here is the difference:
A borrower’s credit score can have a significant impact on his or her financial future. Borrowers with low credit scores may not be able to:
Even if you are not making use of credit at this time, you never know when your circumstances could change in the future. Poor credit or no credit may mean missing out on a life-changing opportunity.
Unfortunately, this can adversely impact one’s credit score. When lenders perform “hard” credit checks, the borrower’s score takes a hit each time. The result is that it can become progressively harder to qualify.
For this reason, it is wise to know one’s credit score in advance of applying for a loan. Each year, you may order one free credit report from each of the three major credit bureaus. These are:
Note that the report you receive will not include an actual numerical score. It will merely list information which can be used to calculate a score.
This provides an opportunity to check the report for accuracy. Dispute any false entries in the story to get them corrected. If you wish to know your numerical score, you may order that as well for a fee.
Avoid the temptation to order all three reports at once. It is smarter to space them out. That way you can get updates on whether your score is improving or not throughout the year. Just be aware that there may be discrepancies from one agency’s report to the next. All three reports are generated differently.
Consumers with no credit may attempt to establish credit through the following methods:
1 ValuePenguin Inc.\”Credit Scores: What are they? How do they work?” https://www.valuepenguin.com/credit-scores
2 The Balance “https://www.thebalance.com/how-credit-scores-work-315541” https://www.thebalance.com/how-credit-scores-work-315541
3 Money “What Is My Credit Score, and How Is It Calculated?” http://time.com/money/collection-post/2791957/what-is-my-credit-score/
4 TransUnion “How Credit Scoring Works ” https://www.transunion.com/blog/credit-advice/how-credit-scoring-works-transunion