Credit scores were first introduced in the United States in the 1950s by the Fair Isaac Corporation (now known as FICO). The credit scoring system was designed to help lenders assess the creditworthiness of potential borrowers and reduce the risk of lending money to people who may not be able to repay it.
Before the introduction of credit scores, lenders relied on manual underwriting processes to evaluate loan applications, which were often slow, inconsistent, and subjective. Credit scores provided a more objective and standardized way to assess credit risk, using statistical models that analyzed various factors such as payment history, credit utilization, and length of credit history.
Over time, the use of credit scores became more widespread, as lenders recognized their value in making more accurate and efficient lending decisions. Today, credit scores are used not only by lenders, but also by landlords, insurance companies, employers, and other organizations to evaluate the creditworthiness of individuals.
Building and maintaining a good credit score is important for accessing credit and getting favorable interest rates on loans, credit cards, and other financial products. Here are some tips on how to maintain a good credit score:
- Pay your bills on time: Payment history is the most important factor in determining your credit score. Late payments, missed payments, or defaults can all have a negative impact on your score.
- Keep your credit utilization low: Your credit utilization ratio is the amount of credit you use compared to your credit limit. It’s important to keep this ratio low (ideally below 30%) to maintain a good credit score.
- Maintain a mix of credit types: Having a mix of credit types, such as credit cards, installment loans, and mortgages, can help demonstrate your ability to manage different types of credit.
- Keep your accounts open: Length of credit history is also a factor in determining your credit score. Keeping your accounts open and active can help demonstrate a long credit history and improve your score.
- Monitor your credit report: Regularly monitoring your credit report can help you spot errors, fraud, or other issues that may be negatively impacting your credit score.
What’s a good credit score?
Depending on the credit agency, the score can vary. The average FICO® Score in the U.S. was 714 in 2022, according to Experian data. 800 is widely considered as having excellent credit.
Each factor is weighted differently depending on the credit scoring model used. For example, the FICO credit scoring model places more weight on payment history and credit utilization, while the VantageScore model places more weight on credit utilization and credit age.
It’s important to note that different lenders may use different credit scoring models or have their own proprietary scoring systems, which may take into account additional factors or place different weightings on certain factors.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
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