Understanding Your Credit Score

Your credit score is an important number that reflects your creditworthiness

How is your number determined?

It is based on your credit history, which explains your overall use of money, and helps lenders to determine if they want to allow you to borrow money. If lenders see that you pay your bills on time and do not have debt, they may be more confident about doing business. On the other hand, if they see multiple late payments and more debt than credit, they might choose not to do business, in other words, lend you money.

According to FICO, only 21.8 percent of the population has what is considered an excellent credit score. The good news is, credit can be built over time and it is never too late to start making improvements. It is important to have good credit, not only to make purchases such as a home or obtain a credit card but to qualify for good interest rates and more. Here are a few important things to know about your credit score.

What is a credit score?

Your credit score, or some may say risk score, is calculated based on the information in your credit report. Most lenders use a FICO score, which is calculated based on these factors:

  • Credit utilization: about 30 percent of your score and takes into consideration how much available credit you’ve used
  • Payment history: accounts for about 35 percent of your score and refers to how often you have a late payment
  • Age of credit accounts: accounts for 15 percent of your score and refers to how old your accounts are and how long-term your history is
  • Account types: about 10 percent of your score and refers to account types including credit cards, home loans, and car loans
  • Inquiries: about 10 percent of your credit score and refers to how many credit checks from lenders are on your account; the more you have the lower your score.

What is a good credit score range?

Generally, credit score ranges vary by model, but the most common ranges are:

  • Excellent: 800+
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Very Poor: 350-579

Who wants credit score information?

Many lenders or companies might check your credit score over a lifetime, whether it’s when you apply for a job, apply for a loan or credit card, rent an apartment, or buy a car or home. Companies are interested in how you handle money and can find that information out from your credit score and credit history. If you carry balances greater than 30 percent of your available credit, this is viewed as less a responsible use of credit.

Why is a good credit score important?

Your credit score can cost you thousands over a lifetime. Having a low score means you’re probably not getting the best terms on credit cards and loans. If you have a low score, you may be paying high interest rates. The better your credit score, generally your ability will be better to receive good interest rates and lines of credit.

If you’re interested in learning your credit score and reviewing your credit history, you can obtain a copy of your credit report from any of the national credit reporting agencies, Equifax, Experian or TransUnion, or by visiting Annual Credit Report. It’s a good idea to monitor your credit report to ensure that your information is correct. There are also credit monitoring services you may register for that will alert you if there is a breach, a credit check or a late payment. A monitoring service can also help to detect fraud.

If you have questions about your overall financial health, it’s always a good idea to seek the guidance of a financial advisor or financial professional. Please schedule an appointment on Bayntree’s online calendar by selecting the date and time that is most convenient for you! You can also always reach us by emailing info@bayntree.com.

Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.

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