Alan Coady

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Credit Scores

Credit Scores: An Introduction to what a credit score is

Credit Score. It's a phrase that we've all heard countless times throughout our lives and it comes up every time you want to purchase a car or a house. It also comes up when you want to rent an apartment and even sometimes when you're applying for a new job. But what exactly is a credit score and how can it help or hinder you? Why should you avoid getting in a bad credit score situation? What follows is an introduction to the basics of what a credit score is and what factors can impact it.

Your credit score is a numerical assessment of your credit worthiness. It is derived from a combination of a wide variety of different sources. Every bill you've ever paid on time, or late, has the ability to impact your credit score for a minimum of seven years. In layman's terms, it's basically like being graded on your credit performance. A low score is much like getting a D or an F in school, whereas a high score can be compared to getting an A or a B. The grades you received in school had a direct impact on the university you were able to attend and whether or not you received scholarships to help you with tuition. Think of a credit score as having a similar impact on the financial areas of your life.

In the United States there are two main credit scoring modules. The first, and most popular, is FICO. It scores everyone who has had any type of credit in their name from 300 - 850. The second version is called VantageScore and it ranks credit scores from 501 - 990. Most companies that request your credit score will receive a FICO score and will go through one of three credit bureaus (Equifax, Experian and TransUnion).

The three credit bureaus also have their own version of the FICO credit scoring system, meaning that they weigh out the items in your credit report differently. So, for example, it is possible to have a score of 700 with Equifax but have a score in the mid 650's with Experian and TransUnion. It is also possible, and quite likely, that the three companies will not have the exact same information on file about your credit history. This is why it's important to review your credit history on a regular basis and to take the necessary steps to correct any mistakes. US citizens are eligible to receive one free credit report a year from all three bureaus. The free report will not include your credit score, though.

Although the basics of your credit score are made up by your credit history, there are a lot of more subtle nuances that are applied when the credit bureaus determine your score. Therefore, simply paying your bills on time isn't enough to ensure that you'll have a high credit score. The total amount of credit available to you (such as the limit on your credit cards plus your car loan) will be weighted against how much of that credit you currently owe. Having a low debt to credit line ratio is very important, as is the length of time that your credit lines have been open. A longer history is better so be careful when canceling credit cards as it can have a negative impact on your score.

Going forward, be sure to be aware of your credit score and how it impacts you; keeping your score high will allow you to receive better interest rates and other loan terms and it may also help you land your dream job!