Credit Score Basics
What is a credit score?
A credit score is a number that represents the risk a borrower poses to a lender. In other words, how likely that borrower is to repay a loan or credit card on time. In general, credit scores range from 300 to 850, with higher scores earning borrowers greater approval odds and more competitive rates.
Why care about your credit score?
There are many reasons to pay attention to your credit score, and start building good credit, even as a teenager. Perhaps the most important reason is that you will qualify for more credit and receive better interest rates. That may sound boring, but a lower interest rate means you will pay less for the most expensive things you’ll ever buy. If you want to pay less for vehicles, or for a home someday, building good credit is very important!
Earning a credit score is like receiving grades in school. The higher grades you get, the more opportunities you will have in life. Good grades help you get into a better college. Your parents may even reward you for those A's and B's. The same is true for your credit score. More doors will open if you achieve a higher credit score.
Having a high credit score may even help you land a better job. You might know that many employers will do a background check before hiring someone, but did you know that some employers will also request a credit report on their applicants? A credit report that shows consistent on time payments and responsible use of credit may give you the edge over someone with a history of late payments and large amounts of debt (especially if you want a job in finance).
What does FICO stand for?
FICO stands for Fair Isaac Corporation (FICO). This company uses an algorithm to calculate a score based on information provided from credit bureaus in your credit report. FICO scores are used by top lenders to decide if you are a good candidate to lend to.
What is a FICO Score?
The FICO credit score is the score that helps the lender assess how likely you are to pay back the money you borrowed.
A FICO credit score uses information provided by one or more of the three major credit bureaus — Equifax, Experian, and TransUnion. Your FICO score can differ depending on which credit bureau is providing the data. For example, your FICO score from Equifax may be higher than your FICO score from Experian. This is because not all lenders and creditors report information to all three credit bureaus.
Lenders may use one or blend all three to decide on whether to lend money, and what interest rate to charge. The credit bureau they use may depend on the type of purchase and payment program the lenders are using. The credit score you have when you purchase a car may be different from the credit score you use to pay rent on an apartment.
In addition to FICO credit scores there are other scores that use their own algorithms to calculate your credit score. But the majority of top lenders will request and use your FICO score to inform their lending decision.