What is a Credit Score and Why Does it Matter?
Updated: Feb 12
We often hear talk of credit scores. What exactly are they, how are they calculated, and why do they matter? Read on to find out.
Credit scores play a major role in whether we can get approved for a loan and what type of interest rate we will get if we are approved. Knowing what a credit score is and how it is calculated will set us up for success.
What is a Credit Score?
Your credit score is a three-digit number that represents your ability to pay off your debts. Lenders use this number to determine how likely they are to be repaid if they were to give you a loan. This holds true for car loans, home loans, credit cards, etc.
Your credit score is a three-digit number that represents your ability to pay off your debts.
Credit scores range from 300 to 850 points. The higher your credit score, the better. Average credit scores range between 660 and 720. A score above 680 will increase your chances of obtaining financing. Your credit score can also affect your interest rate. The higher your score, the more likely you are to get a lower interest rate.
How Is a Credit Score Calculated?
While an individual may actually have many credit scores that vary slightly, they are all run using a similar algorithm.
There are three main credit bureaus that report credit scores: Equifax, Experian and TransUnion. While an individual may actually have many credit scores that vary slightly, they are all run using a similar algorithm. The most common credit score is called the FICO score. FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). Items in these categories are weighted according to the percentages listed and are used to generate one's credit score.
How Do I Know My Credit Score?
There are many ways to pull your credit. They fall into "hard inquiries" and "soft inquiries." Hard inquiries take place any time a lender or creditor checks your credit in response to a credit application. Multiple hard inquiries CAN have a negative impact on your credit score. If you are planning to purchase or refinance a home, it is a good idea to speak with a mortgage broker BEFORE applying for anything that would result in a hard inquiry to your credit.
There are many online websites individuals can use to check their credit scores. Depending on the algorithms these sites use, some are more accurate than others. These sites will give you an estimate of your credit scores, but they are generally not identical to an official credit pull.
Why Does My Credit Score Matter?
Your credit score impacts your ability to be approved for financing (car loan, home loan, credit card, etc.). If you are approved for financing, your credit score may also impact the interest rate you are offered. The higher your credit score, the more likely you are to be approved at the best interest rate available.
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If you are researching your credit score as you plan for a home purchase, it is in your best interest to speak with a mortgage broker early on in this process. At O Capital Group, we offer a free no-obligation consultation to individuals who need help getting started. Give us a call today!
At O Capital Group, we make home loans easy!
Call today: (602) 492-8930
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This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.