Well, think of your credit score as your GPA—the numerical value that summarizes the info on your credit report. A credit score, just like a credit report, will allow creditors to gauge whether you’re a risky customer. Just as a higher GPA might help you get accepted by more selective colleges, a higher credit score will make you more attractive to potential lenders and creditors.
You’ll not only find it easier to get credit with a high credit score, but you’ll also receive a lower interest rate on your loans, saving you a lot of money. A low credit score tells the creditor that you’re irresponsible with money and that there’s a lower chance of you paying a loan back on time. As a result, the creditor needs to charge you a higher interest rate to compensate for that extra risk. No one wants to lend money to someone who’s managed money poorly in the past.
Your credit score is determined by a mathematical formula. Dozens of companies have formulas and scoring models, but the model most of the creditors use is from the Fair Isaac Corporation and called the FICO score. We’ll stick with this one. You have three FICO scores, one from each of the three credit bureaus. The score from each may differ slightly.
FICO scores range from 300 to 850. Anything over 760 will get you the best (lowest) interest rates on credit cards, mortgages, and loans. Anything below 650, and, well, you’re going to have a tough time getting any type of credit, let alone a low interest rate. So how does America stack up? Not too bad. According to the New York Times, 53.2 percent of consumers have scores over 700.
It costs money ($19.95) to check your FICO score, and you can do so at myFICO.com. This is the only legitimate place to check your FICO score. Don’t fall into the traps set by those commercials!
You don’t need to go crazy checking your FICO score all the time. Once a year is adequate, just to check in and see where you stand, though if you’re applying for a car loan or mortgage soon, you may want to check it again. If you don’t have a good score, you’ll want to work on improving it in the months before applying for a car loan or mortgage. We’ll discuss what factors affect your FICO score next, so you know what steps you can take to up this important financial stat.
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