Wise
Your credit score is one of the most important numbers in your financial life. This three-digit figure influences everything from the interest rates you're offered on loans to whether you're approved for an apartment rental. Yet many people don't fully understand how credit scores work or what they can do to improve theirs.
Your credit score ranges from 300 to 850. A higher score means better loan terms, lower interest rates, and more financial opportunities.
What Is a Credit Score?
A credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 850. The higher your score, the more favorably lenders view your ability to repay borrowed money. Most lenders use FICO scores, though VantageScore is another popular model.
Credit scores are calculated using information from your credit reports, which are compiled by three major credit bureaus: Equifax, Experian, and TransUnion. Each bureau may have slightly different information, which is why your scores can vary between them.
The Five Factors That Determine Your Score
Understanding what goes into your credit score is the first step toward improving it. Here are the five main factors and their approximate weights:
Payment History (35%) - This is the most significant factor. Lenders want to know if you've paid past credit accounts on time. Late payments, collections, and bankruptcies negatively impact this category. Even one 30-day late payment can drop your score significantly.
Credit Utilization (30%) - This measures how much of your available credit you're using. If you have a credit card with a $10,000 limit and a $3,000 balance, your utilization is 30%. Generally, keeping utilization below 30% is recommended, and below 10% is ideal.
Length of Credit History (15%) - Longer credit histories typically result in higher scores. This factor considers the age of your oldest account, your newest account, and the average age of all accounts. This is why it's generally not advisable to close old credit cards.
Credit Mix (10%) - Having a variety of credit types (credit cards, installment loans, mortgages) can positively impact your score. However, don't open new accounts just to improve your mix if you don't need them.
New Credit (10%) - Opening several new credit accounts in a short period can lower your score. Each application typically results in a hard inquiry, which can temporarily reduce your score by a few points.
Credit Score Ranges
While scoring models vary slightly, here's a general breakdown of FICO score ranges:
🌟 Exceptional (800-850): Best rates and terms
✅ Very Good (740-799): Excellent rates on most products
👍 Good (670-739): Median score range for U.S. consumers
⚠️ Fair (580-669): May qualify but at higher rates
❌ Poor (Below 580): Difficult to qualify for traditional credit
How to Check Your Credit Score
You're entitled to one free credit report from each bureau annually through AnnualCreditReport.com. Many credit card companies and banks also provide free credit score access to their customers. There are also free services like Credit Karma that provide score estimates.
Checking your own credit score is considered a soft inquiry and doesn't affect your score. Review your reports regularly to catch errors or signs of identity theft early.
Steps to Improve Your Credit Score
Improving your credit score takes time, but the following strategies can help:
"Building good credit is a marathon, not a sprint. Consistent, responsible financial behavior over time will yield results."
1. Pay all bills on time, every time. Set up automatic payments or reminders to ensure you never miss a due date.
2. Reduce your credit card balances. Pay down existing debt and try to keep utilization low on all cards.
3. Don't close old accounts. Keep older cards open, even if you rarely use them, to maintain your credit history length.
4. Limit new credit applications. Only apply for credit when you truly need it.
5. Dispute any errors on your credit reports promptly.
How Credit Scores Affect Loan Applications
When you apply for a personal loan, lenders use your credit score to assess risk and determine your interest rate. A higher score typically means lower rates and better terms. However, many lenders, including Wise Loan, consider factors beyond just your credit score, such as income and ability to repay.
If your credit score isn't where you'd like it to be, don't be discouraged. Many lenders work with borrowers across the credit spectrum. The key is finding a lender that evaluates your complete financial picture.
The Bottom Line
Your credit score is a powerful tool that can open doors to better financial opportunities. By understanding how it works and taking steps to maintain or improve it, you're investing in your financial future. Remember that building good credit is a marathon, not a sprint. Consistent, responsible financial behavior over time will yield results.
