What Is a Credit Score and How Can It Affect You?
LOOKING FOR ADDITIONAL INFORMATION?
Each person’s credit history is filled with a variety of debt accounts, each one nuanced by a variety of factors, such as time and degree of adherence or default. Due to the range of possible factors detailed in different people’s credit histories, comparing one person’s creditworthiness to another’s on the basis of these histories alone can be difficult and, ultimately, subjective. What the credit scoring system does is allow lenders and others with a personal or professional interest in the creditworthiness of individuals to more easily and fairly compare those individuals’ respective credit histories to one another and/or to a baseline determined by the querent on a simplified and equitable scale. Your credit score is a number reflecting an estimation of your creditworthiness as determined by an algorithm, or formula, based on facts in your credit history. These days, an increasing number of people and organizations are seeking permission to look up your credit score in order to help them to make many important decisions directly impacting your life. By understanding what your credit score is and how it can affect you, you can be inspired to learn how to improve and make use of it to benefit your life.
How is your credit score determined?
Perhaps the single most important thing to realize about your credit score is that you have more than one. There is not just one definitive credit score, nor is there one definitive algorithm for calculating your credit score. Rather, there are several companies that generate credit scores and several types of credit scores generated, based on their use, each with its own unique and proprietary algorithm.
Arguably the two most widely used credit scores are the FICO 9 Credit Score generated by the Fair Isaac Company, and the VantageScore 3.0 generated by credit reporting agency TransUnion, both of which range between 300 and 850. Other credit scores widely used to determine people’s creditworthiness and their respective ranges include the following:
- FICO NextGen Credit Score (150 – 950)
- FICO Industry Option Score (250 – 925)
- Equifax Credit Score (280 – 850)
- Experian National Equivalency Score (360 – 840)
- TransRisk New Account Credit Score (300 – 850)
While each of these agencies and credit scores uses a different algorithm and, even, a different numerical range, each one is nonetheless based on the same general factors, as follows:
- Bills paid on time, late or in default
- Credit utilization
- Number of new credit applications submitted
- Diversity in types of credit accounts open (e.g. all credit cards vs. a mixture of installment loans and revolving credit lines)
- Length of credit history
How can your credit score affect you?
A simplified explanation of how your credit score is interpreted by a lender or others interested in your creditworthiness is that a low score indicates your likeliness to pay late or not at all and a high score indicates your likeliness to pay on time or ahead of time. This information can be considered useful to many people and organizations in many different situations affecting your quality of life and, in some cases, even your survival.
Renting a Home
Landlords frequently look up the credit scores of prospective tenants in order to determine how likely they would be to pay their rent on time. Even if your credit score is high enough to convince a landlord to sign a lease with you, it could also be used to determine whether or not and, if so, how much you must pay in advance rent and/or security deposits to secure the residence.
Buying a Home
Banks and other mortgage lenders will typically look up your credit score in order to help determine whether or not to grant you a home loan and, if so, the amount of money to lend you and the terms of the loan.
Starting a Business
When you register a new business, it gets its own federal tax ID number. However, when that business is starting out with no history of credit under that number and it seeks initial funds through independent and small business loans, public grants and private investments, your personal credit history and credit score may be used to determine the business’s creditworthiness for paying back those loans or making productive and profitable use of those investments.
Getting a Job
More and more employers these days are requesting permission on job applications to look up candidates’ credit scores. The permissions requested usually include open-ended permissions to look up your credit score now or, should you be hired, at any time during your employment. Employers further explain in these requests that they will use this information to help determine whether or not to hire or fire you or award you a raise, a promotion or certain responsibilities.
Finding a Mate
These days, if you are single, divorced or widowed and looking to date for potential partnership and romance, you are more likely than ever to be asked for your credit score before a person agrees to date or, ultimately, wed you. While this may seem unfair or excessive on the surface, it is worth considering from the vantage of the person asking. A divorced person who felt taken advantage of financially or that his or her trust was otherwise betrayed in the past may be more careful about placing trust in another person before allowing him or her to get too close. A widow or widower with a large inheritance may have heirs he or she must think to protect. Likewise, a single parent may be thinking about his or her child’s welfare more than his or her own when displaying caution about letting a new person into their lives.