A credit score is a numerical representation of your creditworthiness, which is used by lenders to assess the likelihood of a borrower repaying their debts. It is based on an analysis of your credit history, including your borrowing and repayment behaviour, and is a crucial factor in determining your eligibility for loans, credit cards, mortgages, and other forms of credit.
Here’s a list of key points related to credit score:
- Numerical representation: A credit score is typically expressed as a three-digit number, usually ranging from 300 to 850, with higher scores indicating better creditworthiness.
- Calculation factors: Several factors are taken into consideration when calculating a credit score. These commonly include payment history, credit utilisation, length of credit history, etc..
- Payment history (35% of score): This assesses whether a borrower has a history of making payments on time. Late payments negatively impact this aspect.
- Credit utilisation (30% of score): This reflects the ratio of a person’s current credit balances to their total available credit. A lower utilisation rate indicates better credit management.
- Length of credit history (15% of score): This considers how long a person has had credit accounts open. Longer credit histories tend to be viewed more favourably.
- Types of credit used (10% of score): Lenders prefer to see a mix of different types of credit, which demonstrates responsible credit management.
- New credit inquiries (10% of score): Opening several new credit accounts in a short period can be an indicator of financial stress.
A high credit score is essential for obtaining favourable terms on loans and credit products. It can lead to lower interest rates, higher credit limits, and more favourable repayment terms.
While credit scores are crucial for borrowing, they can also affect other aspects of your financial life. Landlords, insurance companies, and potential employers may also consider an applicant’s credit score as part of their evaluation process.
A common breakdown of credit score ranges is:
- 300 – 579: Poor
- 580 – 669: Fair
- 670 – 739: Good
- 740 – 799: Very Good
- 800 – 850: Excellent