What does your credit score really mean?

What does your credit score really mean?

It seems there are as many commercials on television these days for credit scores as there are for auto sales, furniture store liquidations, and fast food temptations. There’s no denying that loud announcers promoting “unbelievable, never-to-be-seen-

Published Monday, April 13, 2020

It seems there are as many commercials on television these days for credit scores as there are for auto sales, furniture store liquidations, and fast food temptations. There’s no denying that loud announcers promoting “unbelievable, never-to-be-seen-again deals” can be confusing, but many people find the whole notion of credit scores to be even more bewildering. Keep in mind, however, that while it’s okay to tune out those annoying sale ads, sticking your head in the sand when it comes to your credit score can be a huge, and sometimes costly, mistake.

So what exactly is a credit score? Technically speaking, Bankrate.com defines it as “a three-digit number generated by a mathematical algorithm using information in your credit report. It's designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.” In other words, your credit score indicates how likely you are to pay off the money you’ve borrowed in a timely fashion.

While credit scores are primarily used in determining loan or credit approval and just how much interest you will pay on the money you borrow, they are also factored into the equation when it comes to obtaining any kind of insurance, renting an apartment, and even getting a job. Just as much as they are used to assess risk for defaulting on a loan or failure to pay off credit card debt, credit scores are also considered an indicator of how responsible, reliable and ethical you are. The general consensus is that if you don’t pay your bills on time, you probably aren’t responsible enough to take care of a vehicle or an apartment, or show up for work when you’re supposed to. Insurance companies even see a bad credit score as a precursor to making fraudulent claims.

 Credit scores can vary slightly between the three main credit bureaus (Equifax, Experian and TransUnion) because each one may weigh the scoring criteria a bit differently. There should not be significant discrepancies between the three though, as each bureau pulls from the same information in your credit report.

 Credit scores range from 300 to 850. Good to excellent credit scores are typically 700 and above. When you’re in this range, you are considered a low risk for defaulting on loans as well as scoring high on the responsibility chart.

Fair credit means your score is between 660 and 700. You’ll have a more difficult time securing a loan with a fair score because you’re seen as more of a risk. The perception is there’s a greater likelihood you’ll default on your payments. If and when you are approved for credit, you’ll end up paying a higher interest rate, higher insurance premiums, and in some cases, a higher down payment will be required.

If your score is below 650, you’re going to find it extremely difficult to obtain credit, rent or buy a home, or even get hired. The best thing to do with a low credit score is to focus on raising it. Here are some things you can start doing now to improve your credit score:

  • Pay your bills on time.
  • If you can’t pay your bills on time, don’t just ignore them. Instead, contact your creditor and try to make payment arrangements that you can adhere to.
  • Don’t max out your credit and don’t apply for more credit.
  • Create a budget and plan that enables you to pay off your credit card debt as quickly as possible.

For more information on understanding your credit score, click on these links:

http://www.investopedia.com/articles/00/091800.asp

https://www.nerdwallet.com/blog/finance/great-credit-powerful-tool/

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