Have you ever wondered what determines the interest rate you get on big purchases like cars or home loans? It’s not just a random number assigned to you, nor is it something the seller decides. It’s a little thing called your credit score. Let’s take a look at how it works, what makes a credit score “good” or not, and how to find your score.
Here are Five Fast Facts on credit scores:
- ❓ What Is It? When banks and lenders consider loaning money, they want to know their level of risk - how likely are they to get that money back in a timely manner (along with the interest they’ll earn from it). That’s what a credit score indicates. A high credit score means a low risk, so the lender looks at the loan as a good investment. Congratulations, here’s your (translation: their) money!
- 🏆 The Champion - The most common credit score is the FICO (Fair Isaac Corporation). Started in 1989, it is used by around 90% of all lenders in the country. The score ranges from 300-850, and includes several factors like your payment history, how much you owe, length of credit history, and more. A score of 670 or better is considered “good”, while an 800 or higher is “exceptional.” Don’t feel bad, very few people are exceptional in this area.
- 🥊 The Contender - The VantageScore, a competitor started by the three credit bureaus themselves in 2006, has picked up some traction over the last few years because it helps build credit faster. It has the same scoring and uses pretty much the same basic factors as the FICO, but it uses a different formula to determine how the score is calculated.
- 📉 Averages By Generation - Generally speaking, the older you are the better credit score you have. Not only do you usually make more money further along in your career, but you’ve also got more of a history built up, and you’re likely a bit wiser with your hard-earned cash (hopefully) than those young whippersnappers! To give you a frame of reference, the average score overall is 716. Those aged 78 and up average a 761 credit score, while Baby Boomers average a 745. Gen Xers average 709, Millennials 690, and Gen Z are 680. You definitely have to work your way up this ladder!
- 🔍 How To Check - You can check your VantageScore for free anytime through one of their partners. You can get your FICO score from the three major credit bureaus for free annually. Pro tip: get it from one bureau every four months to stay on top of your FICO score all year long without paying a penny!
🔥Bottom line: No matter which credit score you want to use, the recipe for success is the same: pay your bills on time (no seriously, pay off the WHOLE balance), avoid debt if you can, and demonstrate that you can manage your money well. When it comes to credit scores, it’s definitely a marathon rather than a sprint, so set yourself up for success with good habits as early as you can. Your future self will thank you when you can lock down those premium interest rates on the big purchases that matter the most!
What’s the best money management advice you’ve ever heard?
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