What is a good credit score and what is it for? Understand

The credit score is the score used to measure how healthy your finances are. Because of this, this score is very important, as it is what will determine what you can or cannot get from banks.

But do you know exactly what a credit score is and how it works? In this article, we will provide all this information and also show what a good score is.

Follow along and find out what you need to know to improve your financial life.

What is a credit score?

The credit score is a three-digit score that ranges from 300 to 850, and it represents your credibility in the American financial market.

It is calculated by specialized credit agencies, such as Equifax, Experian, and TransUnion, based on various factors such as payment history, amount of debt, length of credit history, new credit inquiries, and types of credit used.

In general, it is a number that represents your standing in the credit market in the country. The higher it is, the better the credit options for you.

What impacts the credit score?

Basically, the score is calculated based on five factors that reflect your financial health. The five main factors that impact the credit score are:

• Payment history (35%): This is the most important information for your score. Paying your bills on time, including loans, credit cards, and utilities, is essential to maintaining a good score.
• Amount of debt (30%): Having many open debts, especially with a high credit card utilization rate, can harm your score. Try to keep your credit utilization rate below 30%.
• Length of credit history (15%): The longer you have a positive credit history, the better your score will be. Start building your credit history as soon as possible by opening a bank account and applying for a student credit card, for example.
• New credit inquiries (10%): Applying for too much credit in a short period can be seen as a risk signal and affect your score. Avoid applying for credit unnecessarily.
• Types of credit used (10%): Having a good mix of credit types, such as credit cards, loans, and mortgages, can help your score. This shows that you are capable of managing different types of debts.

What is a good credit score: understand the score

When you check your credit score, you receive a score that will determine how healthy your finances are. The credit score is divided into ranges:

• 300-579: Poor
• 580-669: Fair
• 670-739: Good
• 740-850: Excellent

A credit score above 740 is considered excellent and offers the best chances of credit approval, with lower interest rates.

In other words, the better your financial life, the better credits and opportunities you will have with banks and financial agencies.

Know the companies that organize the scores

In the American system, the score is a crucial indicator of your financial health, directly impacting your ability to obtain credit, interest rates, and even rental approval.

The main companies that organize credit scores in the US are:

• FICO: The Fair Isaac Corporation (FICO) is the most well-known company for developing the FICO® Score, used by over 90% of lenders in the US. The Score is calculated based on five main factors: payment history, amount of debt, length of credit history, new credit inquiries, and types of credit used.
• VantageScore: Developed by the three largest credit agencies in the US (Equifax, Experian, and TransUnion), VantageScore is an alternative to the FICO® Score. VantageScore uses a methodology similar to the FICO® Score but with some differences in factor weighting.

In addition to these two, other companies also perform credit analysis and scoring, providing data to the financial system.

Among them, Experian stands out, offering the Experian Credit Score, which uses a proprietary formula to calculate the score.

TransUnion is also in the market and offers the TransUnion Credit Score, which also uses a proprietary formula.

Another important company is Equifax, which offers the Equifax Credit Score, which uses a proprietary formula.

It is also important to note that each company uses its own formula to calculate the score. This means that your score may vary slightly depending on the company you consult.

Furthermore, credit scores are not free. You can obtain your score for free once a year by clicking here.

If you need to check more often, you will have to pay a fee to obtain your score.

What information does not impact the score?

Although the credit score is a crucial indicator of financial health in the American system, various pieces of information do not directly influence your score.

Income is not a direct factor, but it can influence your ability to repay your debts. 

Therefore, how much you earn does not affect your credit, but rather the relationship between your income and the debts you acquire.

Age is also not a direct factor, but it can influence the length of credit history. In other words, people who are a bit older and who maintain a good credit history may benefit.

Employment status is another detail that is not a direct factor, but it can influence your ability to repay your debts.

It is also worth noting that the bank balance is not a direct factor in calculating the credit score, but it can influence your ability to repay your debts, just as investments are not a direct factor in calculating the credit score.

Contrary to what many believe, checking your credit score to compare prices of products and services does not impact your score.

Other information that does not impact the credit score includes your marital status, level of education, housing history, and employment history.

It is important to emphasize that the information that impacts the credit score may vary depending on the company that calculates the score.

Now that you know what a credit score is and what it is for, it is worth maintaining a high score to have opportunities.

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