What Is My Credit Score

What number between 300 – 850 is the most important to your financial life?  This number determines many things in your life, and most people don’t even know what it is.  Having the wrong number can mean that you can’t buy a new car, purchase your dream home, or could make you pay thousands more than someone with a higher number.  This number is your Credit Score.

Your credit score is number determined from a secret formula created by Fair Isaac and Company.  This is often called your FICO score.  This number is used by thousands of businesses you interact with during your life to determine your credit risk.  This allows the banks to calculate how much of a risk giving you money is, and can change the direction of your life.  Let’s explore all the ways your credit score affects your life. 

Banks use your credit score all of the time.  You probably don’t even know they are using it.  For example, if you want to open a new credit card, the credit card company will get your credit score and determine what your credit line will be.  They also use it to decide how much interest they are going to charge you.  They continue to check this number and will adjust your rates and limits as your credit score changes.  Going for a car loan?  The banks use this to see if you should get a new car.  Low number?  You’re getting a clunker.  Almost all of your interactions with any credit source are recorded with the credit bureaus.

Banks aren’t the only businesses that use your credit score. Insurance companies use it extensively to help determine what rates you will pay. Having a low credit score can make you pay up to twice as much for car insurance. Home owners insurance can be up to three times as expensive. I guess if you aren’t good at paying your bills you are more likely to burn your house down. I don’t think so. If you have ever tried to rent an apartment and were turned down, your credit score might be to blame. Landlords use your credit score to determine if they will rent to you. Looking for a new job? Better check your credit report because your prospective employer is going to. It is very scary to think of all the interactions in your life that are determined in some way by your credit score. This number is controlled by three major credit bureaus that track all of your financial transactions. They don’t always get it right either.

Equifax, Experian, and TransUnion keep track of how you pay your bills. Do you pay one time? Do you always pay the minimum? How many lines of credit do you have? How much outstanding debt do you have? Are all of your credit cards maxed out? Have you opened several new accounts in a short period of time? They use all of this information to determine your FICO Credit Score. Each bureau holds their accounting of your transactions secret. This can lead to all kinds of mistakes, leading to an incorrect FICO score. You will have to collect your credit report to verify that all of the information is correct (this is also good at determining if you have been a victim of identity theft). Once you have your credit report you will have to pay a fee to see what each bureau lists your score as. Luckily you can use annualcreditreport.com to get your report from Equifax, Experian and TransUnion once per year for free. Try to only get one every four months and you will always have a recent record of your credit history.

Your FICO number will fall in a range that will determine what loans and rates are available to you. Here is a quick summery of what the numbers mean:

• 720+ - Boy you know how to handle your money. Banks will give you their best rates and high limits. You are very low risk, and you reap the rewards in huge savings.
  
• 700 – 720 – You have excellent credit. You will get great rates and high limits, just not quite as good as the higher ranges.
  
• 680 – 699 – You have pretty good credit. The banks will give you a decent deal, but they will be watching you.
  
• 620 – 679 – You are probably going to get that loan, but one slip up and your toast. The banks will watch you like a hawk.
  
• 580 – 619 – You are the banks best friend. You are getting close to bad credit, but they are willing to give you a chance for a price. They know you might default, but the high rate they are charging you is giving them a fat paycheck.
  
• 500 - 579 – Okay, you really need some help. You have bad credit but I might give you a loan. It’s going to cost you up to three times what a person with a 680 would pay.
  
• Below 500 – When the bank manager sees this he is going to call security! Your credit is really bad. You will not get a loan. Better luck next time. See Ya!