What is a Credit Score?

What is a Credit Score?

A credit score is a numerical rating representing your credit worthiness. Credit score ratings usually run on a scale between 300 and 850; the higher your credit score is, the more trustworthy you are considered to be by banks, credit card companies, and other financial institutions. Basically, your credit score determines your reputation as a borrower.

In the US, credit scores are based on reports from one or more credit bureaus, also known as consumer reporting agencies. A consumer reporting agency acts as a data store and report provider for individuals’ borrowing and payment activities.

How does my credit score affect me?

If you have a high credit score (generally, 650 or higher) it is easier for you to get loans, mortgages, and payment financing than if you have a low credit score. People with higher credit scores can also typically get better terms on their loans and mortgages than those with lower credit scores.

Why? Financial institutions like having customers with high credit scores, as that means it’s more likely the borrower will make all of their scheduled payments until the completion of the loan. With a higher credit score, you are more likely to be offered borrowing incentives like favorable interest rates or higher credit limits.

Your credit score (or credit history) may also be checked by any of the following parties:

  • Your employer (your consent is required)
  • Any government agency
  • Landlords and condo associations
  • Insurance companies
  • Vehicle and equipment rentals
  • Public utility providers (electricity, water, etc.)

What types of activity affect my credit score?

Your credit score is largely determined by the following items:

Your payment history. Consistently making your debt payments to all of your lenders has a positive impact on your credit score. If you miss one or more payments, your credit score will drop.

Total amount of debt you’re carrying. The ratio of the debt you’re carrying compared to your total available credit limit is known as credit utilization. Using up most of your credit limit will have a negative impact on your credit score.

Total length of your credit history. The longer you have been actively borrowing and repaying debts, the more positive the effect on your credit score. For example, the average credit score for people aged 18-29 is 637; the average score for ages 40-49 is 675.

New credit you’ve acquired. Every new credit application you submit will usually drop your credit score, particularly if you make several different credit applications in a short period of time.

Types of credit being used. If your credit history is based only on credit cards or department store cards, your credit score will be lower than if you had experience with a variety of credit items like a mortgage or a car loan.

People who have a low credit score can sometimes still borrow money using a Loan Agreement with a private citizen or company.

You can get more information about credit scores and reports on the US Government’s website, including how to request a free credit report.

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Aaron Axline

Marketing Writer at LawDepot
Aaron Axline is an author, technology journalist, blogger, and knowledge management expert based in Edmonton, Canada. He likes cats.

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