Loan and Credit Score: Definition, Factors and How to Improve It 2024
A credit score is a three-digit number that lenders use to assess your creditworthiness, or how likely you are to repay a loan on time. Your credit score is calculated based on your credit history, which includes information such as your payment history, credit utilization ratio, and length of credit history.
How is a credit score calculated?
There are two major credit scoring companies in the United States: FICO and VantageScore. Each company uses its own proprietary formula to calculate credit scores, but the factors they consider are similar.
Here are some of the most important factors that affect your credit score:
- Payment history: This is the most important factor in your credit score. Lenders want to see that you have a history of making on-time payments.
- Credit utilization ratio: This is the amount of credit you’re using compared to the total amount of credit you have available. Lenders want to see that you’re not using too much of your available credit.
- Length of credit history: The longer your credit history, the better it is for your credit score. This is because lenders have more data to assess your creditworthiness.
- New credit accounts: When you open a new credit account, it can temporarily lower your credit score. This is because lenders see it as a sign that you’re taking on more debt.
Types of credit scores
There are different types of credit scores, each of which is used for a different purpose. For example, lenders may use a different credit score to approve you for a mortgage than they would for a personal loan.
Here are some of the most common types of credit scores:
- FICO Score: This is the most widely used credit score in the United States. FICO Scores range from 300 to 850, with higher scores indicating better creditworthiness.
- VantageScore: This is another popular credit score in the United States. VantageScores range from 300 to 850, with higher scores indicating better creditworthiness.
- Bankcard Score: This credit score is used by some lenders to assess your creditworthiness for credit cards. Bankcard Scores range from 300 to 850, with higher scores indicating better creditworthiness.
How does a loan affect your credit score?
Taking out a loan can affect your credit score in a few ways. First, when you apply for a loan, the lender will do a hard credit inquiry. This can temporarily lower your credit score by a few points.
Second, taking on new debt can increase your credit utilization ratio. This can also lower your credit score.
Finally, if you make on-time payments on your loan, it will help to improve your credit score over time. This is because your payment history is the most important factor in your credit score.
FAQs
What is a good credit score?
A good credit score is generally considered to be 700 or higher. However, lenders may have different credit score requirements for different types of loans.
How long does it take to improve my credit score?
It can take several months or even years to improve your credit score significantly. The amount of time it takes will depend on how bad your credit score is and how well you manage your credit in the future.
Where can I get a free copy of my credit report?
You can get a free copy of your credit report once a year from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can request your free credit reports at annualcreditreport.com.