Your credit score is like the adult version of childhood school grades. They may seem unfair or unimportant, but a lot rides on them. Your credit score is tied to your financial future, and can open or close financial and lifestyle doors for you. But there’s one group of people for whom a credit score may not matter.
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Your credit score is like your grades were as a student. That is to say, pretty important. Your grades were a reflection of what kind of student you were (or are). In the same way, your credit score is a reflection on how you handle money.
Your credit score is calculated using specific information from your credit reports. And it’s vital to your finances and the fulfillment of your dreams, because it greatly impacts your interest rate on loans, employability, the ability to open bank accounts, and more.
Your FICO Score – The Credit Score “Grade” that Actually Matters
Your college grades (hopefully) opened doors into a career for you. Likewise, your FICO score (aka, your credit score) opens doors into fulfilling all those dreams you have. That makes it a critical part of your financial picture. It influences how much credit is available to you… and the terms (like interest rate) that a lender offers.
When you apply for credit – whether it’s a credit card, mortgage, or car loan – lenders want to know how much risk they face. They largely determine this by looking at your credit score. Will you be faithful to repay the loan or will they be stuck for it?
Your credit score is a number – a snapshot in time that summarizes that risk based on how well you’ve handled loans and other financial responsibilities in the past.
While there are several types of credit scores available, 90% of lenders request FICO scores… so that’s the one you should pay the most attention to.
The “Big Three” Credit Bureaus Call the Shots
The Fair Isaac Corporation created FICO scores. They influence billions of credit-related decisions every year. FICO scores are calculated using information maintained by three large credit bureaus. Those “big three” are Experian, Equifax, and TransUnion.
This calculation compares your information with the patterns of the buying public at large. The results reflect how likely you are to repay your loan on time.
What Makes Your Credit Score “Good”?
FICO scores range roughly from 300 to 850. The higher your score, the lower risk you are to a lender. A “good” credit score is in the 670 to 739 range.
Having said that, there’s no single written-in-stone cutoff score used by all lenders. Each lender has their own level of risk tolerance. They may also include other factors in their lending decisions.
Where do you fall on this scale compared to other U.S. consumers?
Your report must contain enough information – recent information – to quantify a credit score. Generally, that means you have a loan you’ve been paying on for at least six months. But be forewarned…
Each credit bureau has differing information based on who reports to them. So expect your credit scores to vary between the credit bureaus.
Is your score wildly different between the bureaus? If so, check your credit report for accuracy.
Note: There’s a difference between your credit score and your credit report. Your credit score is a numerical representation of how creditworthy you are. In contrast, your credit report gives the specifics of your payment history for credit cards, mortgages, student loans, car loans, and store credit cards. You should periodically check your credit report for accuracy.
What’s NOT on Your Credit Report?
Certain information will not be on your credit report… because it’s not used to calculate your FICO score. This information includes
your race, color, religion, national origin, sex, or marital status. U.S. law prohibits including or using this information for lending decisions.
- Your age.
- Your occupation, title, salary, employer, dates employed, or employment history.
- Your interest rates on current or past loans.
You Might Not Need a Credit Score If…
If you plan to pay cash for everything in your entire life and never choose to acquire a credit card (even for convenience), you may not need a credit score.
Here at MyWalletWisdom.com, we’re big fans of avoiding debt – and when necessary, repaying it with breakneck speed and paying off your credit card balance each month. That said, most people will need to borrow to buy a house. Some may need to borrow to buy a car, at least in their younger years. At some point you may want a business loan, which may be tied to your personal credit score.
Strictly from a convenience viewpoint, our guess is that most people will also want to put their normal weekly expenses such as gasoline and food on a credit card. It’s easier to do any of that with a decent credit score.
And remember, it’s also easiest to get credit when you don’t really need it.