The Minute Blog

GET THE LATEST NEWS, INFO, AND LIFE HACKS

Loans

Line of Credit

Installment Loans

Personal Finance

Credit Score: What is it and Why is it Important?

Feb 20, 2014 | Personal Finance

What is a Credit Score?

Your credit score is a three digit number obtained from detailed information about your credit history.  It is an important number because your score plays a crucial part in your financial future.

Why is It Important?

When applying for credit, lenders will check your score to see how good it is. Therefore, it can affect the amount of interest you will pay on a loan. Your score can impact car insurance rates and in recent years employers are checking credit scores during the hiring process. According to a 2012 survey from the Society for Human Resource Management, 47% of employers use credit scores when making a hiring decision. But what exactly is a credit score; how is it calculated; and why is this number so darned important?

A credit score is a number that indicates to lenders how likely you are to pay back the debt that you owe based on your history. The higher the credit score the more likely you are to pay back the money you borrow.

Who Calculates The Scores?

The most widely known type of score is a FICO. The three major credit reporting agencies, Equifax, Trans Union and Experian also calculate credit scores based on their own proprietary statistical model. Each company has their own approach, a secret sauce, to calculating this important number. Are you confused yet?

The Numbers

How do you know what a good number is if each company has a different calculation for measuring credit. Scores range from 300 to 900. Here is an approximate range of how scores are judged:

  • Excellent credit = 720 and above
  • Good credit = 660 to 719
  • Fair credit = 620 to 659
  • Needs Improvement = 619 and below

How Are The Scores Calculated?

The exact formulas used to calculate the scores is a mystery. Fair Isaac provides an estimated breakdown of what factors impact the score calculation and how much weight they carry:

  • Timeliness of payments = 35%
  • The amount of revolving debt in relation to the amount of your total revolving credit =30%
  • Length of credit history =15%
  • Type of credit used (installment, revolving, consumer finance) =10%
  • Amount of credit recently obtained and recent searches for credit = 10%
Certain events impact your credit score. Late payment of bills and loans can damage your credit score. It is important to get in the habit of paying your bills on time. A pattern of late payments can damage your credit score.

Managing Your Score

It is important for young adults and adults of all age to establish and maintain good credit. U.S. residents are entitled to view their credit report from each of the three credit bureaus for free once every 12 months. It’s a good idea to check your credit report regularly so that you can correct any errors that appear on your report and monitor it for identity theft. To do this, you can go to annualcreditreport.com.

Your credit score is an important number that you should keep track of on a regular basis. It’s a measure of your financial responsibility.

Do you know your score?

The information provided is for informational purposes only and is not a substitute for professional financial advice. You should consult a credit counseling professional concerning the information provided and what should work best in your financial situation. And any action on your part in response to the information provided is at your discretion.

Related Articles

How to Make Budgeting Fun

What if budgeting was one of your favorite hobbies? Without thinking too much about it, write down five of your favorite hobbies. If "budgeting" made it onto your impromptu list, consider yourself lucky. For most folks, shopping and dining out take priority over...

read more

How Pineapple Can Reduce Healthcare Costs

A pineapple a day keeps the doctor away…and much more! Pineapples are not only delicious but they may be one of the most healthful foods available today.  Below are some intriguing and little known facts about this tropical fruit. Pineapple is valuable for easing...

read more

How a Debt Default Could Affect YOU!

With only days left until the U.S. default deadline, a mix of angst and anger are setting in at home and abroad. While the world watches, Americans such as you, our readers, most want to know what to do to prepare and how this will all affect our lives in the short...

read more