Knowing how credit scores work, how to monitor them, and how to improve them is an important part of your financial well-being.
Credit-scoring models tend to weigh your payment history and utilization ratio most heavily when calculating your credit score. So, making on-time payments every month and keeping your credit-card balances low are two key factors in raising your credit scores.
Lenders use credit scores to approve you for financial products like home loans, auto loans, personal loans, and credit cards. In general, the higher your credit score, the better terms you'll get for your loan or credit card: lower interest rates, bigger loan amounts or credit limits, and, in the case of credit cards, more lucrative rewards.
Credit reports include all the accounts that lenders have reported to a credit bureau, the length of time those accounts have been or were open, your payment history, and your account balance. They include information about the lender, as well, including name and contact information.
Credit bureaus use a variety of scoring models to calculate credit scores. Some of those models are designed for the housing industry, while others are tailored to the auto industry. Each one includes certain metrics and nuances that help lenders make decisions about loan and credit applications.
The most common factors that can hurt your credit scores are late payments and high credit-card balances relative to your credit limits. Credit-scoring models tend to penalize your score more heavily the later you are on a payment, too ("delinquency"). For example, being 90 days late is significantly more damaging to your score than being 30 days late.
A credit score is a number that evaluates and rates your creditworthiness based on your credit history. Lenders use credit scores to decide whether to approve someone for a loan or credit card, and to determine what interest rate to charge.
A credit check is something a lender, bank, or service provider performs when they need to check your financial history. It grants them access to information about your existing and past credit, payment habits, and types of loans so they can assess your risk level as a borrower.
Bad credit is usually defined as a credit score under 580. A person with bad credit is considered a risky borrower, usually due to owing large amounts of money or having a history of unpaid bills and debts. Having bad credit can make it hard to get a credit card, mortgage, or other loans, too.
Tier-one credit is a credit classification that auto-loan lenders often use to identify borrowers with the best credit.
Credit refers to your borrowing capacity. It's based on your history of paying back your debts, and it defines how much you are able to borrow cash or access goods and services.
A FICO score is the branded version of credit score most widely used by the nation's largest financial institutions to make credit and loan approval decisions.
A hard credit inquiry is when a lender checks your credit before approving you for a loan, such as a mortgage or car loan, or a credit card you’ve applied for.
FICO Score 8 is a credit scoring model from Fair Isaac Corporation that is widely used by lenders to help determine how worthy potential borrowers are to obtain credit and what interest rate they should be charged. This version of the company's base credit scoring model was released in 2009.
Your credit utilization ratio compares your credit card balances to your credit limits. In other words, it's how much you're currently borrowing compared to how much you could borrow.
“A” credit is a grade a lender may give you if you have a particularly high credit score as a borrower.
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