⌛ Video Length — 00:10:36

Lesson Summary

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A credit score is a number that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders.

A credit score is based on credit history, the number of open accounts, total amounts of debt, and repayment history.

Lenders use credit scores to evaluate the probability that an individual will repay loans on… or late.

There a different types of credit scores and how they are calculated. But, one thing is for certain- it’s impossible to get ahead with low scores.

How Credit Scores Work

A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. Your credit scores are divided into categories form poor-excellent. Let’s take a look closer.

• Excellent: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 580

Credit scoring categories

• Payment history- 35%
• Debt owed- 30%
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

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The cost of low credit scores

There’s a huge cost for having poor credit.

People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime loan at a rate higher than a prime borrower in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.

Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in their paying less money in interest over the life of the loan. 

Take this for example.

With that in mind, you should know… There are two main credit scoring models banks use to determine your creditworthiness.

Let’s take a look at them to give you a deeper understanding.