Understanding credit scores: define your own adventure
Defeat jargon once and for all with the experts from AAA
Credit scores are essential to building a secure financial future for yourself. But what are they exactly? Well, the technical and more formal definition goes a little something like this:
A credit score is a three-digit number generated by a mathematical algorithm composed of data on your credit report. Its purpose is to predict risk and the probability of your becoming delinquent on your credit responsibilities.
So… what’s a credit score again?
Well, before we define the jargon within the jargon, let’s try something new. Many times, a comparison can bring a concept to life more than a definition can. So, we’re explaining credit scores with analogies you may know a little more about: baseball and video games. Choose the one that’s right for you:
Understanding your credit score through analogies
Many times, a comparison can bring a concept to life more than a definition can. Here, we explain credit scores using analogies you may know more about: baseball and video games.
Understanding your credit score through baseball
Understanding your credit score through gaming
Wasn't that fun? And now that we’ve grounded ourselves on the general concept of a credit score, here are some specifics to further understand this important financial term.
Different credit scores
There are many different credit-scoring models. A favorite scoring tool is a FICO score, developed by the Fair Isaac Corporation. According to myFICO.com, 90% of financial institutions use your FICO score for credit decision-making.
How is your credit score calculated?
Five categories go into calculating your FICO credit score, and each factor is weighted differently:
- Payment history (35%): Paying bills on time is crucial. Late or delinquent payments negatively impact your score.
- Credit utilization (30%): This measures your balance-to-limit ratio. Keep your utilization under 30%, ideally paying balances in full monthly.
- Credit history (15%): The length and variety of your accounts, such as mortgages or credit cards, contribute to this factor.
- Recent activity (10%): Recent credit applications and inquiries impact this factor.
- Capacity (10%): Includes outstanding installment debt and overall credit capacity.
What actions might impact your credit score?
Actions like closing a credit card may affect your score in multiple ways. Closing an account reduces available credit, possibly lowering your score due to higher utilization rates. Always understand how your actions impact credit criteria.
How can you access credit scores?
You are eligible for a free credit report from all major bureaus every 12 months at AnnualCreditReport.com or by calling 1-877-322-8228.
If you spot an error, contact the bureaus and the institution responsible for the claim. You can file disputes at:
Take the time to review your credit report regularly. A higher credit score can help you save money through lower interest rates and improved financial security.