Are you as perplexed as most people when it comes to understanding what your credit score means? Simply put, your credit score is a measure of your past ability to make payments on time and manage your credit. It’s designed to help lenders determine how likely you are to pay back your loan.
The number is calculated using a formula created by Fair Isaac Corporation, which is why it’s also referred to as your FICO score. Consumers may feel like they are back in school again, doing everything possible for a few more points to increase their credit score. Today’s economy and the aggressive marketing of three-digit credit scores has practically turned a high score into a status figure – but it’s so much more!
The nation’s three largest credit reporting agencies — Equifax, TransUnion and Experian — use FICO software to calculate scores. The information used in determining your FICO score comes from a variety of places including major credit bureaus, credit card companies that issued you a credit card, banks and other financial institutions where you have loans, and other databases containing consumer data that may influence your score. The reporting agencies then sell the scores to lenders that underwrite car loans, cards, mortgages, and other types of credit.
Unlike the score you received from the science or math quiz you took in school, this score can have a direct and severe impact on your everyday life! Credit scores now affect everything from car loans and mortgages to credit cards and auto insurance, and even employment!
The numbers are added up and your score is one determining factor in whether you qualify for low cost credit, higher risk credit, or no credit at all. The way the scoring range works, the higher your credit score, the better your credit is. This translates into lower interest rates on loans or other type of credit you may be attempting to obtain. On the flip side, if you have a low credit score you will pay higher interest rates, or possibly be turned down completely.