A credit score is a 3-digit score that highlights your creditworthiness and it is used by all companies that offer financial products, utilities, rental properties, cell phones and more to assess whether you are a safe and trustworthy person to offer services, lend money or do business with.
You automatically get a credit score when you turn 18 and this starts at zero, hence you hear about people with no credit ratings. But it is something that you can build up over time by taking out different types of credit such as credit cards and paying these back on time every month. Therefore, your credit score can constantly go up or down giving potential lenders and partners an idea of your current financial status and whether you are right for a product or not.
Your credit score is recorded by one of the 3 main credit reference bureaus in the US, who are Equifax, Experian and TransUnion. These 3 agencies having different scoring models that they use, but generally speaking, the higher the number, the better your credit score. The bureaus hold this information in real-time, so every time there is a transaction that is processed in your favor or not, your score will automatically go up or down. This information is then available to any potential lender or partner who will ‘run a credit check‘ on you.
Key Things About Credit Scores
- A credit score refers to one’s suitability for receiving financial credit and is an indication of how financially responsible a person is
- The information is held in real-time and updated after every transaction you make
- Your credit score is available when a company runs a credit check on you
- Credit scores take into account your level of debt or if you have any unpaid bills
- It is a way for lenders to determine how much of a risk a borrower is
How Is A Credit Score Calculated?
A credit score reports the history of how you’ve paid your bills, how much credit you have and other financial circumstances in a three-digit number. Using the credit score, lenders can predict with some accuracy how likely the borrower is to repay a loan and make payments on time.
Your credit score is made up largely of:
- Payment history – How well have you paid off recent credit cards, loans and other bills. If you pay them on time, your credit score goes up or maintains its position. If you miss payments, your score goes down
- Credit utilization – This refers to how much credit you have open and access to. The less credit you use, the better it looks to potential lenders and partners. If you have lots of credit cards and too much credit open, this means that you could be a risky person to lend to, since you may not be able to handle all the credit and may eventually miss payments.
To understand your credit score and how to improve it, you’ll need to know how it’s calculated. The number ranges from 300 to 850 and can vary slightly, but anything over 800 is usually deemed excellent and anything under 500 is deemed to be very poor. The credit bureaus base this around the FICO score to make their calculations:
| Experian | FICO | VantageScore | Equifax | |
| Excellent | 800-850 | 800+ | 800-850 | 800-850 |
| Very Good | 740-799 | 740-799 | 781-800 | 740-799 |
| Good | 670-739 | 670-739 | 661-780 | 670-739 |
| Fair | 580-669 | 580-669 | 661-780 | 580-669 |
| Poor | 300-579 | Below 580 | 300-600 | 300-579 |
Your credit score can give a lender a representation of your financial history and current circumstances including:
- All loans (personal, installment, payday loans etc)
- Mortgages
- Sometimes rent
- Credit cards
- Overdrafts
- Utilities
- Bankruptcy
- Cell phones
A bad credit score rating is typically between 300-629
What is a FICO?
A FICO Score is arguably the most widely-recognised and widely-used credit check service. Lenders use it as a metric to determine how likely you are to repay them. It is based on multiple factors including:
Payment History – whether you have paid past payments on time
Amounts owed – if you have any outstanding debt (both credit and loans)
Length of credit history – how long you have had credit
New credit – how often you apply for new credit and new accounts
Credit mix – the range of active credit products including installment loans, credit cards, finance company accounts, mortgage loans, payday loans, etc.
How Is A Credit Check Carried Out?
When applying for a credit card or loan, a lender will ask your permission to access your financial information. At this point, they will run a credit check and request the information from a bureau such as Equifax or Experian and it all happens in microseconds and is typically automated, with the checks running against their own scoring.
The lender can then view your credit score and any outstanding debts and decide whether you are suitable for their loan or product.
A lender can see your full name, date of birth, and electoral roll information, which confirms your current and previous addresses. A credit check gives the necessary financial information to your lender. The credit check is an automatic process, and you will not need to provide the information to the lender. Information can also be accessed on whether your identity has been used for fraud.
Which Companies Check Your Credit Score?
- Potential lenders
- Banks
- Credit unions
- Landlords
- Brokers
- Cell phone providers
- Car dealerships
- Employers
- Utility providers
What is a Good Credit Score?
Typically, a credit score of 700 or above is thought to be a ‘good’ credit score (taking into account a credit range of between 300 and 850). The average credit score is thought to fall between 600 and 750. A good credit score is an indication that you are reliable borrower. In general, a higher score conveys more confidence to lenders that you can meet the payments agreed in the repayment plan.
What is a Bad Credit Score?
A bad credit score is typically a score of 580 or lower (on a scale of 300 to 850). Bad credit indicates that borrowers have a history of unpaid bills, late payments or debt. Typically, a bad credit score can make it more difficult to obtain a credit card or a loan and often you will have a higher rate of being declined and bt high interest rates for products.. However, some lenders have specific bad credit loans to make it easier for this borrower profile to obtain a loan.
How Do I Know My Credit Score?
Regularly checking your credit score is a good habit to get into, whether or not you are applying for credit or loans. You can visit the website of the credit bureaus and there is usually a small monthly fee to check your score on demand. They will also give you suggestions where you can make improvements and show you what products you mind be eligible for.
Checking your credit score does not affect your credit and, in fact, can even help improve your credit. Regularly keeping track of your credit score can alert you to potential risk factors such as errors or fraud. There are ways in which you can check your credit score with services such as the FICO website or Credit Karma. Many loan providers offer a credit check as part of their services. See the full list of places to check your credit score here.
How Important Is My Credit Score?
VERY! Having a good credit score is absolutely essential to purchase anything on credit or get any kind of loan, car or mortgage – and it is essentially the source of your financial freedom!
Your credit score could affect you getting a mortgage for a house or dream car and determine whether you are accepted for a loan including payday loans, short term loans and also credit cards.
Lenders will take your credit score in to account and perform a credit check when you submit a loan enquiry. This is an essential part of the loan request process, helping the lender work out whether you will be able to afford the loan repayments.
By evaluating your credit score and assessing your financial history, a lender can better view whether to approve your loan request. This does not mean that you will be denied a loan if you have a poor credit score. Pheabs is willing to consider loan requests with a range of credit histories. This means that you may be able to find a loan with Pheabs even if a bank has already turned you down.
How Can I Improve My Credit Score?
There are a number of ways to improve your credit score including:
The Basics – Start by joining the electoral roll where you can vote for upcoming candidates. By confirming your name, age and residence with the local authorities, this is something that immediately boosts your score because it shows you are a real person.
Consider taking out a small credit card if you need one and get used to regularly paying this back on time to build up some credit. There are products known as ‘credit builder credit cards’ which are designed especially for this.
Pay Loans Off On Time – You must pay off any kinds of credit or loans on-time to build up your score or to get your score to improve. Falling behind on payments will cause your credit score to fall and you have to avoid this wherever possible.
Avoid Too Much Credit – Avoid taking on too many credit cards, loans, big mortgages, leasing too many cars and financially stretching yourself. If you do this, your credit score will naturally fall as you look more stretched. Try keeping your credit at a 30% utilization rate to avoid taking on too much.
Disassociate With People With Bad Credit – If you share a joint account, bank account or mortgage with someone with bad credit such as a spouse, parent or sibling, your credit score is impacted by association, because it is assumed that you will be supporting and helping them financially. Where possible, try to remove yourself and have a single account.
Last Updated on December 18, 2023 by Daniel Tannenbaum, Founder of Pheabs