What is a Credit Score?

If you are interested in getting your financial house in order, it is important for you to have a grasp of the various elements of your credit report, including that all important credit score. Through this article, you are provided with basic information about a credit score.

Credit Score -- Defined

A credit score is a scale that lenders and other companies who would extend credit to you will use to determine the level of risk they are about to embark upon. This will affect the restrictions on your credit activity, the rate at which you are loaned money, and could ultimately affect insurance and even your employment.

The Specifics of Your Credit Score

Your credit score is a three digit number that is determined by your credit history and debt behavior. It lists your loans, past and present credit, payment history, bad debt, and current open lines or credit. It also reflects the number of years you have had credit and the types of credit given to you, among other things. This is translated into a number from 300 to 900 that gives a potential creditor their level of risk when doing business with you.

How Your Credit Score is Used

This scoring system is used by the big three credit reporting bureaus—TransUnion, Equifax, and Experian. With assistance from Fair Isaac and Company, the agencies encouraged the development of this system (called FICO) and each agency uses its own version of it. Although a new method is being developed now, called VantageScore, the FICO system should remain the standard for at least a while longer.

Why Your Credit Score is Important

So what makes this score so important? Because not only does it determine whether or not you will get a loan or a good interest rate, it can also make a difference in whether you get insurance. When you apply for insurance, you are given a score based on your credit report. Statistics have shown that financial management and insurance risk often go hand in hand.

Potential Employers and Your Credit Score

Your credit score can also be used by potential employers to help them decide between job applicants. An applicant with a poor credit score may not be a good candidate for a position in security, for instance. Other employers may simply use it to decide which candidate is generally more likely to complete work as requested or able to manage the everyday affairs of a department. Those who can’t manage their own lives aren’t likely to be able to manage a handful of them. Just remember, an employer can’t check your credit score without your written permission.

Interest Rates and Your Credit Score

Even if all your score affects over your lifetime is your interest rate, that’s a lot. Fair Isaac reports on their website that $300,000 mortgage (30-year fixed rate) to a borrower with a FICO score of 760 to 850 would pay 5.683 percent interest. This brings monthly payments to $1,738. An equivalent mortgage for someone with a rating of 580 to 619 will cost them 8.271 percent interest. This makes for a whopping $2,258 payment every month, a difference of $520.