Imagine that you’re a loan officer at the local bank. Two customers, Mr. Rich and Mr. Buck, come in to borrow money. You check Mr. Rich’s history; he has an excellent credit score, 800. Mr. Buck’s score is an embarrassingly low 300. To whom should you lend money? Mr. Buck’s low credit score indicates that he might not be able to repay the loan. Buck doesn’t stop here; goodbye, Mr. Buck.
What is a credit score?
When you were in school, your grade point average (GPA) indicated how well you performed in your classes. Your SAT and ACT scores measured overall achievement in language and math. Colleges used these indicators to decide if they wanted to admit you to their freshman class.
Your credit score works in a similar way as school tests, except that it’s a measure of your credit risk. Like college entrance exams, a credit score is derived from a standardized formula. Late payments on bills, having no credit references, and unfavorable credit card use will mar your credit history and lower your credit score.
Your credit report indicates how likely you are to pay your bills. It’s used anytime you’re seeking a mortgage, car loan, or credit card and also, for determining credit limit, which is the maximum amount of money you can borrow. Your credit score can even determine the premium you’ll pay for car insurance. Your credit report determines not only whether you will be given credit, but also, what interest rate you will be eligible for. A higher credit score gives you a lower interest rate when you’re borrowing money.
Who determines your credit score?
Credit scores range from 300 to 850. Most people’s score is 600 to 800. A credit score of over 720 is considered to be a good score and will generally get you the best interest rate.
There are three companies that provide credit scores, Equifax, TransUnion, and Experian. They are corporations that make their money, not directly from you, but from companies such as banks, that loan money to people. Each of the three allows you, the consumer, to receive a free credit report annually. But, it’s not done automatically; if you want to know your credit score, you’ll need to get on the website of one of these three companies and specifically request your score. Each calculates your score a bit differently. You can learn about these companies on their websites.
Equifax has been around for about one hundred years and is located in Atlanta, Georgia. They are a Standard & Poor’s (S&P) 500 company publicly traded corporation; symbol EFX, on the New York Stock Exchange. Equifax serves fifteen countries in North America, Latin America and Europe.
TransUnion, a global company, located in Chicago, serves twenty-five countries on five continents, for the past thirty years. They provide credit services and information management. They are a limited liability corporation (LLC); therefore they are not a publicly traded company.
Experian serves sixty-five countries and has 15,500 employees. Their stock trades on the London Stock Exchange, but formerly traded on NASDAQ under the symbol EXPN.
How can you improve your credit score?
It’s prudent to check your credit score yearly with one of the three credit reporting companies. When you receive your report you want to first, review it carefully and see if there are any errors or flaws. For example, if the report shows an old unpaid balance on your Target credit card, you’ll want to contact Target, and get that corrected. The other way to raise your credit score is to make sure you pay down any credit card debt that you have.
You should not close any unused accounts. This may go against your better judgment. But, closing credit card accounts, especially more than one at the same time, could be a red flag that you might be a credit risk.
Why does your credit score matter?
Your credit history is your credit reputation. It is maintained by a credit bureau. So how can you have a credit history if you’ve never had a credit card or borrowed any money? And, how do you establish a good credit history? The main way is to open a checking or savings account and to manage it well, such as avoid overdrawing the account. Second, pay your bills on time, and third, use your credit card carefully. These may seem obvious, but many people must be clueless, because they have a low credit score.
Borrowing money is a smart way to establish a credit history and have a favorable credit score, as long as you are responsible about using credit, whether from a lending institution or a credit card. When you are ready to finance your first car or get a mortgage for a house, you will be very pleased with yourself if you have a high credit score.
Debra L. Karplus, MS, OTR/L
Registered Occupational Therapist