What is a Credit Score and Why is It Important?

What is a Credit Score?

If you go to purchase a house, car, or even obtain a credit card, you will always be asked for your credit score. A credit score is a three-digit number that represents the likelihood of you paying back the lender. Credit scores can be as low as 300 and be as high as 850. A credit score is calculated by your repayment history, total debt, types of debt, length of credit history, and much more. Fortunately, credit scores are calculated for you and can be found on credit agency websites such as Equifax and Experian. Credit scores, however, are calculated differently depending on what agency you use but the most widely adopted credit score metric is that of FICO^®. 

A credit score is important to both borrowers and lenders as it provides the lender with insight into how credible the borrower is and it provides the borrower a chance to show their credit deservingness. When you go to find financing, the borrower needs to be assured that you are going to pay them back at the decided amount and on the decided repayment schedule. Furthermore, having a credit score opens up many doors as you can obtain items and experiences that you may not have the cash on hand to finance.

Where a Credit Score is Needed 

Credit scores are becoming a requirement for all types of purchases and financing. With necessary items becoming more expensive day by day, having a credit score can really help you live comfortably. Some of the common essentials that require a credit score are:

• Buying or renting a house
• Buying or renting a car
• Auto insurance
• Credit card
• Cellphone contract
• Personal loan
• Financing furniture

Low Credit Score Means Limited Borrowing

With a low credit score, being able to purchase or finance key essentials can become a struggle. There is a high chance that you may not get approved for your home loan or rent contract because your low credit score shows that you’re not a strong borrower. Even if lenders choose to approve you despite your low credit rating, they will charge unfavorably to compensate for the risk. To exemplify, a person wanting to finance a car with a low credit score may be subjected to a higher interest rate with a shortened borrowing period than someone who has a better credit score. With credit cards as well, you will be charged a higher APR and may not qualify for welcome bonuses if your credit score is lower than their expectations. In short, credit scores determine what you’re able to borrow and how. 

Optimal Credit Score

The optimal credit score that everyone should aim for is at least 680 and above. At 680 or above, you are a lot more likely to be able to obtain financing and credit cards with great terms. Lenders have their own ranges for determining what differentiates a poor credit score from a great credit score. Most commonly, however, lenders choose to use the FICO range to determine how good your credit score is:

• Excellent: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

Establishing and Checking Your Credit Score

If you are new to building credit or are just unaware of your current credit score situation, it’s very simple to turn things around. You can start building your credit score by ensuring that payments for your debts and bills are happening on time and in the allowed amount. Paying simple bills such as that of your electricity and gas can help facilitate the growth of a credit score. Further, you can apply for secured credit cards that are specifically geared for people building their credit scores who have no prior credit history. You can keep track of your credit score progress with free tools allowed by secured cards or through credit checking websites such as Experian or FICO.  

Credit Score is a Must Have

In short, credit scores are becoming more relevant to the growing demand for expensive purchases. Further, credit rating is a metric that is becoming widely popular by lenders and retailers for allowing consumers to purchase goods. In this view, maintaining a suitable credit score can only benefit you as it can enable you for future financing and agreements. With a low credit score, however, you greatly risk the chance of being offered excellent terms such as a low-interest rate. Even if you’re not thinking about buying a house or a car, you’re definitely going to encounter credit score requirements in one place or another.