How Does a Credit Score Work?

Here's a question we get often:

"How do credit scores work? What is the maximum/minimum score I can get, what is a bad or good score? What are the things that actually impact my score?"

Your credit score is a measure of your creditworthiness as a borrower/payer. It is what landlords, lenders, car dealerships, and other interested parties use to determine whether to offer you a lease or loan and at what rate.

It is an incredibly important metric to stay on top of, because without a good credit score you may be unable to:

• rent an apartment
• qualify for a mortgage
• qualify for a car lease
• obtain a personal loan
• obtain a small business loan
• a bunch of other really important stuff...

Your credit score can range from 300-850, with 850 being the best. If you haven't already, go check out your credit score using Credit Karma.

Your credit//FICO score is comprised of 5 key variable and activities:

1. Payment history:

Making sure you don't miss payment obligations or have bills going into collections. HOLDING A BALANCE IS NOT GOOD FOR YOUR CREDIT SCORE - THIS IS A COMMON MISCONCEPTION.

2. Hard inquires/new credit:

Opening new credit accounts will typically have a short-term negative impact, as they exhibit credit-seeking behavior. We wouldn't worry too much about this unless you are trying to take out multiple loans at the same time.

3. Age of credit history:

The longer the average age, the better. Closing your old accounts will decrease your average age, hurting your score. It is always better to improve your standing with old accounts than to consistently open new ones.

4. Credit card utilization:

What percentage of your credit line you are utilizing. The lower the better, though 0% utilization won't help you build credit. We recommend staying under 15%, though you should use 30% as a hard limit

5. Total number/mix of credit accounts:

Having a mix of accounts (mortgage, student loan, credit card) improves your score. More accounts is actually good for your score, but is less manageable; this is one of the ways credit scores are actually not consumer-friendly. We recommend having somewhere between 10-20 throughout the life of your credit file - not all of them need to be active or used at the same time. It's normal to have 3-5 active accounts at once.

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