You want to buy a car—so you need an auto loan. You’ve heard that a good credit score is important, but you’re not sure what that means.
The most common answer to the question, “What’s a good credit score?” is anything over 670. But you probably have other credit-related questions, so we won’t leave you hanging like that.
What is a credit score? Why is a good credit score important? How do I find out what my credit score is? We’re covering all of this and more—let’s get started!
What is a Credit Score?
A credit score is a three-digit number that represents your creditworthiness and how likely you are to repay your debts. In a nutshell, it indicates to potential lenders—including banks, car dealerships and credit card companies—whether you’ve managed credit responsibly or if it’s too risky to lend to you.
While there are many ways to determine credit scores, FICO is the most widely known system. FICO, which comes from Fair Isaac Corp.—the company that first created a credit scoring system—uses a 300-850 range.
Generally, credit can be judged using this scaling system:
740-799: Very good
FICO uses the following factors (and weights) to determine credit scores: payment history (35%), amounts owed (30%), length of credit history (15%), how often you apply for new credit (10%), and the variety of credit products you have (10%).
Why is a Good Credit Score Important?
The higher your credit score, the more confident lenders will feel about your ability to repay. The more confident lenders are, the more favorable the terms of your loan will be.
Having bad credit doesn’t necessarily disqualify you from receiving a loan, though your chances of being approved are lower. However, without good credit your interest rate will land at the higher end of a lender’s range.
Because of this, the difference between good credit and poor credit can really cost you.
For example, let’s say your FICO score is 640. You want to apply for a $35,000, five-year auto loan. Your interest rate could be 11%, meaning you would end up paying almost $11,000 in interest.
However, if you managed your credit responsibly and had a credit score of 720, perhaps your interest rate is only 4%. On the same loan amount and term length, you’d be paying under $4,000 in interest.
Why Should I Find Out My Credit Score—and How Do I Do It?
While you’re entitled to a free copy of your credit report every 12 months from each of the three nationwide credit bureaus, this doesn’t include your credit score. Rather, the information in these credit reports is used to determine your credit score.
Most credit card companies provide customers with free access to their credit scores. You can also visit free credit-scoring websites—which often don’t charge any sign-up fees for basic updates. Another option is to use a certified nonprofit credit counselor.
Despite what many people think, when you check your own credit score it’s known as a soft credit inquiry, which is not reflected in your credit report.
It’s important to know and understand your credit score. Doing so can:
- Provide a better understanding of your financial situation and what you can afford
- Help when comparing financial products
- Make it easier to improve your score
- Alert you to fraud
How Can I Improve My Credit Score?
Paying your bills on time, disputing credit report errors, and receiving a higher credit limit are ways to improve your credit score. Also, choose secured credit cards that report your activity to all three credit bureaus—because, while you often need good credit to get a credit card, they are also one of the best ways to quickly build good credit.
At Sunrise Banks, we know that a good credit score is the first step toward financial empowerment. Our Credit Builder Program can help you build your credit while establishing a strong payment history. Learn more and apply online today.