How Are Credit Scores Calculated?

If you’re looking into personal loans and other similar areas, the topic of credit scores will inevitably pop up sooner or later. Everyone is aware of credit scores and the fact that they should be striving to keep their own at a high level – but do you know exactly what goes into determining your credit score, and what defines a “good” score in the first place?

As it turns out, a shockingly low number of people have an even basic idea of what’s going on behind the scenes, and where those numbers are coming from. If you are in that category, you owe it to yourself to change that fact as soon as possible. Otherwise, you might continue living your life with some wrong assumptions, and make the same mistakes many other people do.

Basic Concepts

The most basic idea behind a credit score is that it indicates how trustworthy you are as a borrower, or a customer in general. Your score is affected by a number of factors, such as how regularly you make payments on outstanding lines of credit, whether you pay your bills on time, as well as more serious issues like defaulting on a loan and bankruptcy.

Generally speaking, any time you do something that a creditor might want to know about, you can assume that it will impact your credit score. It might not be by much, but as we’ll see below, even small differences can matter a lot in the long run. That’s especially true if you allow them to start stacking up at some point.

Low and High Values

Your credit score doesn’t start from 0. 300 is generally considered to be the bottom line for most people’s credit scores, although there might be some exceptions in some very specific situations. Anything above that is an improvement. The higher your score goes, the better access you’ll have to financial products and services on the market.

Values above 750 are considered “high” and will generally give you the best possible deals on the market as well as access to certain exclusive offers that might not be available to people with lower scores. The top of the bar is at 850, although very few people can boast with such a high credit score. 850 is more of an ideal value that’s not achievable under realistic circumstances in most cases.

Small Differences Can Mean a Lot

As you can see, there’s a pretty big gap between the top and the bottom of the chart. This might lead you to think that someone with a score of 450 is not too different from someone at 500 – but you’d be wrong. Even small differences can matter a lot when it comes to your credit score. It’s not rare to see something as low as 20 points changing the conditions of a deal offered to someone. Every single point counts when you’re trying to get the best conditions the market can provide you with, which is why it’s so important to ensure that you never miss a single payment if you can afford it.

Check Your Credit Report

Your credit report is a summary of all your financial activities – things that have impacted your credit score. Any time you do something “good” or “bad”, it will go in there. But in most cases, you’d only be concerned with the negative marks in your credit history. It’s a good idea to check your credit report regularly to ensure that there is nothing in there which you don’t expect. Mistakes can happen, and sometimes a company might forget to erase a negative mark after you’ve fully paid off a loan, for example.

You are allowed to request one free copy of your credit report per year. This is only valid if you go through the main agencies though – there are lots of middlemen on the market who will charge a fee for the service. Anyway, make sure to take advantage of that offer on a regular basis. Go through your report every year, and if you spot anything that looks out of place, get in touch with the corresponding company and try to get it fixed. If that goes nowhere, you can dispute the entry on your credit report. As long as you have proof that you’re in the right, it will eventually get removed.

Many factors can play into determining your credit score, and sometimes you might find it at a lower level than you anticipated, simply because you neglected a certain factor in your life. Understanding how the system works and taking full advantage of the tools it provides you with is important if you want to ensure that you have a good score when you need it one day.