Your credit score is one of the most important numbers to know, yet it’s also the one that causes the most confusion. The better your credit score, the lower the interest rates you’ll be charged when you purchase a house or car, or take on any other debt. When you’re just starting out, there are steps you can take to build healthy credit and ensure you’re getting the best rates possible.
Understanding Your Credit Score
Let’s start with the basics. Your credit score is a 3-digit number ranging from 300 to 850. There are three major credit scoring bureaus – Experian, Equifax and Transunion, and they each have their own scoring models.
However, the general ranges are:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800-850
Your credit score may feel like some mystical number that is calculated on the whim of a big organization. And while the exact formula for calculating credit scores is proprietary and varies by bureau, we do know the top 5 factors that affect your credit score.
The largest impact on your credit score is your payment history (if you pay your bills on time), representing 35%. The second most important factor is how much outstanding debt you have. The length of your credit history is 15% of your score, which is why it’s important to start building your credit early. The number of new accounts and inquiries you have, as well as the different types of credit, each represent 10% of your score.