What is a Credit Score/Report?
Your credit score is one of the most important parts of your financial profile, so what is it and how does it affect other areas of your life? Simply put, your credit score is a three digit number that is calculated from your credit report. Now you might be asking yourself, "What is a credit report?" A credit report is a detailed report of your credit history prepared by a national credit bureau.
Your credit score, found on your credit report, is one factor used by lenders to determine whether you are eligible to get a credit card or be approved for a loan or mortgage. If you are approved, your credit score can affect what interest rate you are charged. Your credit score is an indication of your overall creditworthiness, the likelihood that you will pay your bills, so it is a numerical expression used in a variety of capacities. You might only think of banks when you think about credit scores, but other organizations, such as insurance companies, landlords, and cell phone companies also use your credit score to evaluate the potential risk of lending you money or extending some type of service your way.
How your Credit Score Affects your Finances
For example, if your credit score is low, it may be difficult to rent an apartment. Just like a lender or credit card company, a landlord wants to make sure you will pay rent every month prior to taking you on as a tenant. Once you move into your new place, if you want to set up cable or Internet, you guessed it - your credit score plays a role in whether you will need to put down a sizeable deposit prior to establishing these services in your name.
A credit score is based on the information on your credit report, and reports are typically generated by three major credit bureaus:
Like most businesses, credit bureaus are not perfect and have the tendency to make mistakes. As a result, it is best practice to check your credit report about twice a year in order to make sure all the information is accurate.
Credit scores range from 300 to 850, so a good score is generally considered to be 720 or higher. It's important to continually work toward a higher number, because every lender has different standards for what they consider to be a good credit score.
How it is Calculated
Your FICO credit score, the credit-scoring model that dominates the market, is made up of information from five major categories. Some factors are weighed more heavily, such as payment history (35 percent) and debt owed (30 percent).
The other three categories include:
- Length of credit history (15 percent)
- Types of credit used (10 percent)
- New credit (10 percent)
Since your credit score can mean the difference between being denied or approved for a line of credit or a loan, as well as what interest rate you are offered, it is important to keep your number as high as possible. Your credit score can even make an impact when it comes to your job search, because some employers check your score as part of the application process.
The bottom line is your credit score is one of the most important aspects of your financial profile. Be sure to do your due diligence by staying on top of your payments and regularly checking your report for accuracy.