What is a Credit Score?

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You’ve heard all about credit scores. They’re super important and seem to affect pretty much every aspect of our financial lives but does anyone really know what exactly they are? Does anyone know exactly how they work? Most people have no idea so we’re here to help. We explain where your credit score comes from, what it is, and how you can make the most of yours.

What is a Credit Score?

Credit scores are created by looking at credit reports and analyzing the details to try and figure out how a certain person is most likely going to behave financially in the future. It takes into consideration how much debt a person has, and their history with paying bills (including lateness), and comes up with a score based on a prediction of how this person will pay their bills in the future or handle an increase to their credit line. If their past finances indicate someone with responsibility then their credit score is generally better and if they haven’t been responsible in the past, their score is generally lower.

Who Creates these Scores?

The majority of lenders and insurance providers use credit scores created by FICO®. They use credit information from the 3 major credit reporting agencies; Equifax, Experian, and TransUnion.

Why Have You More than One Score?

The weird thing about credit scores is that you could have a dozen different scores created right now. This seems weird but it means that one score doesn’t have to be definitive. If you get a score that you think seems unfair it means you still have options.

Different credit reporting agencies come up with different scores because they may have different credit information on you. Your information is collected separately by agencies and can therefore have differences.

Another reason you might have more than one is because there are also several different credit scores you can get. They’re used to predict different things: credit-based insurance scores inform lenders how likely a person is to claim on their insurance. It means that whether you are applying for a credit card or car insurance, the lender can make an informed decision on how you have handled this specific finance in the past.

There are also ‘educational scores’ which are created exclusively to educate consumers about their credit score and rating.

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Source: Thinkstock/Wavebreakmedia Ltd.

What Does Your Score Mean?

Based on the FICO® scoring system (which is the most commonly used), the following brackets determine your credit score: aka your perceived level of liability to a lending agency.

  • 750+: Excellent
  • 700 – 749: Good
  • 650 – 699: Fair
  • 6600 – 649: Poor
  • Below 600: Bad

If you Check your Score Does it Hurt your Credit?

No. Not in the slightest. In fact checking your credit score is recommended so that you can be knowledgeable about your credit rating. You’re entitled to check as many times as you like without any negative repercussions. However, if you ask your bank or car dealer to check for you, it may negatively affect your score.

How Fast Does your Score Change?

Your score is calculated on the information that is available at that time. The only reason it would change is if there is new information reported that might significantly change your score. A collection account being reported for the first time, or if you dispute something you find on your report could be reasons for a change in your score. If these things are reported, the next time you request a report, you may see a change in your credit score.

So there you have it. Your credit score broken down to simple English. It really isn’t that complicated but a lot of people are intimidated by the terminology and the influence it has over their finances so hopefully, this makes things easier to understand!

Featured Image: Thinkstock/ almagami

Posted on June 27, 2016