Like most of us, your credit score is something you have, but it might not be something you understand. That’s all about to change. Keep reading to learn five critical facts about this financial stat — what you learn can help you manage your money better.
1. It Falls on a Broad Range
FICO — short for the Fair Isaac Corporation — is the single most popular method for calculating scores in the U.S. and Canada. Both countries have a unique scale for scores.
- Canada: 300–900
- USA: 300–850
If you’ve been building credit, your score will fall somewhere on your country’s unique scale. In both models, these ranges are split down the middle between prime and subprime scores.
2. It’s not the Same as Your Report
Some people might use the terms score and report like they’re the same thing, but they aren’t. Your report is a detailed list of the past six years or so of your borrowing history. It includes your information on both open and closed accounts, payment history, and outstanding debts. Your score, on the other hand, is a numerical value based on the details of your report.
3. Your Score Determines Your Borrowing Options
Generally speaking, borrowers with prime scores qualify for the greatest number of loans at the most competitive rates. Consumers with subprime scores can’t access the same selection of options. They might even be rejected if their score gets too close to 300.
That doesn’t mean you can’t borrow money if you have a bad score. However, your options may be limited, and the loans you qualify for may come with higher rates.
After all, your score represents your creditworthiness. Lenders check this when you’re applying for a line of credit or loan to determine what kind of borrower you will be if they approve you. The higher your score is, the more likely you will repay your loan on time. The lower your score is, the more likely you may pay your bills late.
Not getting paid is a red flag for lenders, so they might adjust their offer to reflect your risk level. They might reduce the amount they provide or raise your rates and fees.
4. Your Score May Impact More Than Your Borrowing Options
While your score has the greatest impact on loans, other parts of your life fall within its blast radius. You might have to show your score to future landlords, auto insurance companies, and even employers.
These entities check your score for the same reasons as a lender. They want to assess your risk before they extend an apartment, job, or insurance policy. How they incorporate your score into this decision will vary, but a good score will always look better than a bad one.
5. It’s Always Changing
Are you starting to feel hot under the collar now that you know the consequences of a bad score? Admittedly, it can be stressful to realize the power your credit has over your life, but don’t worry—your score is dynamic.
That means two things:
- Your bad score won’t hang over your head forever. All entries in your file will only last roughly six years before it expires and no longer affects your score.
- You can easily add good entries to your score by establishing a few basic financial habits. Always pay your bills on time, don’t max out your lines of credit, and apply for new loans sparingly in emergencies.
These tips will help you pack good entries onto your report, which will contribute toward a higher three-digit score. Keep this in mind if you’ve hit some speedbumps in the highway of life. Eventually, you can put these past mistakes in your rearview mirror.