Most people don’t have enough cash to cover the full price of large purchases such as a house or a vehicle. They have to secure funding by borrowing money to cover most or all of the purchase from a lender or financial institution. Over time, the borrowers or debtors will repay this money according to terms agreed upon with the lender. This repayment is scheduled according to a certain period of time and usually includes interest, that is a charge for this loan. The companies that lend the money have criteria for deciding which loan requests to agree to, and the particular terms. They make decisions based on the borrower’s ability to repay as defined by a three-digit number called a credit score.

What Is a Credit Score?

This credit score is a numeric representation of your creditworthiness, which is a function of your history as a borrower. This rating indicates to potential lenders of how likely you are to make your repayments on time and in full. Borrowers with higher scores are considered less of a risk to lenders and are usually offered the best terms including higher borrow limits, lower interest rates, longer repayment periods and even better minimum down payment requirements. This rating is not just reviewed by lenders, but also insurance companies, utility providers and some employers. It’s safe to say that credit makes the world go around.

How can I Find my Score?

The best way to find your score is through a free credit report, which you are entitled to once a year. You don’t want to discover that you have delinquent accounts or fraudulent activity on your record after being rejected for a loan. Three reporting companies or bureaus, Experian, Equifax and TransUnion usually provide your credit history to entities that are making an inquiry about your existing and past debts. You should also understand how scores are viewed:
  • Exceptional: 800 and above
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 579 and below

Debtors with high credit scores are usually offered the best loans and interest rates. If you have never borrowed before, you are viewed as having no credit. It’s important to build your credit through responsible borrowing. Paying bills on time and repaying your loans in full are critical to establishing good credit. Consider opening an account for a secured credit card to get started.

What Factors Into My Score?

It’s also important to understand the factors that affect your credit score and how your actions can affect these factors:
  • Payment History (35%): Paying bills on time continuously has the biggest effect on your rating.
  • Credit Utilization (30%): Using too much of your available credit reflects negatively. Keep the ratio of your balance to your borrowing limits at less than 30%. For example, if you have a credit card with a limit of $10,000, you want to keep your balance below $3,000.
  • Credit History (15%): Having a long credit history looks good to borrowers as it suggests that you are experienced at managing your debts. This is why you shouldn’t close accounts when they’re paid in full, as this lowers the average age of your accounts.
  • Credit Diversity (10%): Lenders prefer borrowers that can manage various types of debt, such as student loans, mortgages and credit cards.
  • New Credit (10%): If it looks like you’ve been applying for too many new accounts in a time period, this can lower your score as it looks like you’re desperate for credit which also gives the impression of poor debt management.
It’s safe to say that your credit score can significantly impact your life, based on its factoring into your ability to borrow money to buy a house or take out a loan to pay for college. Check up on your score at least once a year and more frequently if you anticipate needing credit soon. Take advantage of the free report and come up with a plan to improve your rating if necessary. Borrow responsibly and develop good spending habits from the beginning.