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What Do Credit Scores Mean?

what do credit scores mean

A credit score is a number between 300 and 850 that reflects a person's financial history. A higher number reflects greater financial responsibility and stability. Although the exact formula used to calculate credit scores is not available, it is largely based on payment history and the amount of available credit that is being used. Bankruptcy, unpaid judgments, or overdue accounts, among other things, are significant black marks on a credit report that reduce an individual's score. Some of the main things that positively influence the number are making payments on time, having available but unused credit, and having the right types of debt.

The majority of credit scores are in the 600s and 700s, with the national average in the

United States

being approximately 680. Numbers over 700 are considered good credit scores. Many mortgage lenders use 620 as a dividing line between who does and doesn't get offered subprime loans. Scores below 550 and above 800 are relatively rare, with each group making up about 13 to 15 percent of the population. It's generally better to have no credit history at all, as in instances of young adults who have never borrowed money, than to have a poor credit score.

Credit scores can have significant meaning. In general, having a low number means that someone will have much more difficulty borrowing money, and they will have to pay more for the privilege when they do. When buying a home, for example, individuals with higher credit scores are approved for loans

with relative ease. They are eligible for lower interest rates, which saves thousands of dollars over the long run. People with low credit scores, on the other hand, are subject to paying Private Mortgage Insurance (PMI) charges and higher interest rates, if they can get approved for mortgages at all.

Credit scores also affect other everyday activities. Increasingly, potential employers check applicants' credit histories when deciding who to hire for a position, especially when the job involves handling money. Some insurance companies charge higher rates to those who have poor credit histories, because they're statistically more likely to make claims. People with scores that are lower than average often have to pay deposits for utilities and cell phone contracts. They may also have rental applications rejected by landlords.

Lenders, insurers, and the other institutions that check credit scores do so in an attempt to protect themselves. A person with a low credit score is seen as a high risk, while someone on the other end of the spectrum is a low risk. With lenders, individuals with poor credit and histories of late payments or nonpayment are much more likely to default on future loans. They must pay for this in the form of increased interest rates and extra fees, to help offset the risk that the lender is taking by doing business with them. Credit scores change all the time, and it is possible for a person to improve their number significantly by paying off past debts and staying current with present ones.

Category: Credit

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