What the Heck Is a Credit Score?

illustration of a colored credit score meter

The credit score, oh how mysterious and looming you once were. Luckily, in the modern age of same-day-shipping-toilet paper and Cronuts – the smoke and mirrors of the great and powerful credit score of oz have been lifted.

What we’re left with, while still important, isn’t nearly as ominous as it seems.

What the FICO is a credit score?

The score part of credit score comes from something called FICO. Many people assume FICO is a government run “federal something something”, nope!

FICO stands for Fair Isaac Corporation, which is a private company that developed a tool to “guesstimate” people’s behavior. Starting to sound strange now? While there’s a few other companies that provide something similar, FICO is by-far the leader in gathering – and selling – credit information.

Basically, it’s a program that determines just how likely you are to pay your bills or not.

The credit score you’re given is a 3 digit number that is used to tell lenders how much they can “trust” you to pay your debts. When you put that way, it sounds more like a crazy judgmental ex.

Your credit score is essentially the same thing as your report card from back in ye’ olden days of misery (grade school). “They” track your credit history to determine the likelihood of you paying your loan, and assign you a score based on that guess.

Who reports my credit?

Who’s “they”?

Meet the three stooges of credit reporting – Experian, Equifax and TransUnion. These head honchos gather up our credit histories and report them to the many different lenders, bankers, rental companies, and other such exciting venues we want to borrow from.

Illustration showing experian, equifax and transunion as each of the three stooges.

Since there’s no definitive standard among the cagey credit industry, your score can shift up or down depending on who you’re requesting it from. For the most part though, it’s largely irrelevant who’s reporting your score, and will only differ by a few points.

Don’t worry

Now if this all sounds frustratingly inconsistent to you, don’t worry, you’re not alone. Not only do the “big three” have different methods of gathering FICO data, different types of loans can report varying degrees of scores as well. Good grief!

For the most part, just checking your credit score every now and again from is totally fine. Your score will safely float around the same place, no matter which credit union is reporting it.

Where to find your score

Luckily, checking your credit score is much easier now than it used to be (and free!). I prefer to use Credit Karma, as they pull from both TransUnion and Equifax. Not only that, they give a nice breakdown of what exactly is being used to determine your score, and anything you can do to help boost it!

If you prefer a more direct route, you can always go to your bank’s website. Nearly every major bank offers free credit reporting if you’re an account holder.

What makes up my credit score?

While each of the 3 stooges (TransUnion, Equifax, Experian) use slightly different systems, generally there’s 5 key areas that determine your credit score. Here they are in order of most significant, to least.

  1. How consistently you pay your bills on time
  2. The amount of credit you’re using (is your credit card maxed out?)
  3. The length of time your accounts have been open (credit history)
  4. Your credit diversity (credit cards, mortgages, car loans)
  5. How many recent accounts you’ve opened (hard inquiries)

What’s a good credit score?

Great, we’ve got our credit score, but what the heck is a good or bad score? Typically most places that give credit reports (such as Credit Karma) will flat out tell you if your score is good or bad. That aside, here’s a handy dandy chart to know roughly where your score puts you.

illustration of credit scores. 300 to 579 is very poor. 580 to 669 is fair. 670 to 739 is good. 740 to 799 is very good. 800 to 850 is exceptional.

Good credit is important

Since your credit score is acting as a sort of badge of trust between you and the bank, a good credit score is critical when applying for loans. As your trustworthiness rises, you may qualify for lower interest rates and lower holding deposits. Low interest loans can save you thousands upon thousands of dollars over your financial future.

When lenders see a high credit score, they’re wringing their sweaty palms in anticipation of giving you a loan. Essentially, they see you as a risk-free investment (because you are!), almost like you’re a juicy savings account to grow their money in.

Already have good credit? Check out some awesome credit cards you may qualify for!

Subprime loans

Now that we know what a good credit score can do for us, what exactly does a bad score do?

*Cue horror music*

Enter, subprime loans.

Lenders use the term “subprime” as a label for people with poor credit (under 650) who are applying for a loan. As the lender gazes at you with shifty eyes, you might be hit with higher interest rates, larger down payments, and less flexible payment periods.

Someone with good credit may get a 72 month car loan at 3% interest. That car loan can easily turn into a 50 month loan with 8% interest, if you have poor credit. Yikes!

On top of poor loans and snobby bankers, some places may require you have a co-signer with good credit, just in case you fail to pay your debt. This is particularly common among rental properties, such as when a young person is getting their first apartment.

What’s a cosigner? Check this out!

How to build your credit score

Now that we have all the negatives laid out, here’s a few tips on how you can start (or continue!) improving your credit score.

Step 1. Pay. Your. Bills. On. Time!

Illustration of a clock

This is the single most important factor of your credit score. There is nothing that excites a lender more, than seeing how responsible you are about paying your loan on time.

You know that time you borrowed your favorite one-of-a-kind Batman pen to a coworker, and they never gave it back? That’s the same anguish and distrust the bank feels whenever someone doesn’t pay their debts.

Be a good friend, return your pens, and pay your debts!

Step 2. Don’t close your credit cards

illustration of a stack of credit cards

Do you have multiple credit cards open? That’s good! A strong credit history is the second most important part of your credit score. These two steps alone make up a whopping 65% of your score!

If you’re not using your credit cards, house them somewhere safe so they don’t get lost or stolen, just don’t close them out! Not only does your history improve when you have multiple open credit cards, your total credit usage goes down as well. Sounds like a win / win!

Did you know? Got a credit card that costs an annual fee that you don’t use anymore? Call your credit card provider and ask them if they can downgrade your card. This way you wont lose out on your history, and save money at the same time!

Step 3. Increase your credit limit

illustration showing $10,000

Your credit limit is yet another big hitter when it comes to your credit score. By increasing your credit limit, you’re not just boosting your total credit – which improves your score – you’re also lowering your total use of credit. Yet another win / win, woo!

Step 4. Be patient

illustration of an hour glass

OK, it’s not really something you can do, but it is something! Be patient, building your score takes time. Don’t check your score every week and panic as it moves up and down, that’s just how the weird system of credit scoring works. Check once every few months, make sure it’s headed in the right direction (up)!

TL;DR

Much as some advisers and banks want us to believe, our credit score isn’t some mystical thing we can’t know about. While your credit score does matter to some extent, it’s not something you should stress over and constantly check.

Think of it this way, your credit score is a measure of doing things the right way.

  • Pay your debts on time
  • Don’t use your whole credit limit
  • Keep building your credit history
  • Have some patience

If your score is low from a recent financial blunder, don’t panic. Just follow these handy steps and you’ll be building it back up in no time at all. Remember, your credit score is a lot like a report card, be a good student and you’ll be fine! It’s really that simple.

Now that you know all about credit scores, learn how to handle a credit card, responsibly!


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