Your Credit Score - What It Is and Why It Matters

You’ve probably heard the phrase “credit score,” but you might not know what it is or why it’s important. Here’s a quick overview.

What is a credit score? This is a number that helps lenders predict how likely it is you’ll pay back the money they lend you—whether it’s a “loan-loan” (like a loan you take out to buy a car or pay for school) or a credit card.

How’s it calculated? Most credit bureaus rely an algorithm developed by Fair Isaac Corp.—better known as FICO. It uses information from your credit report like your current credit card limits and/or loan amounts, when you opened your credit accounts, account balances and payment history. Things that hurt your score include making late payments, having an account that’s sent to a debt collector, not making payments on a loan (also known as defaulting) or maxing out your credit cards.

Why should you care about your credit score? Lenders use your score to decide if they’re willing to loan you money and what interest rate they’ll charge you. If you’re considered very risky, you might not be able to get a loan or credit card; if you’re considered at least somewhat risky, you might have to pay a higher interest rate, which could mean bigger payments and less money in your pocket.

A low credit score—or no credit score if you’ve never borrowed money before—might mean your parents will need to co-sign your loan or credit card (which means they’ll be responsible for your loan if you don’t repay it).

What’s a good credit score—and a bad one? FICO scores usually range from 300 to 850. Here’s how our friends at FICO describe the risk associated with various scores:

Score Risk Rating
800+ Exceptional
740-799 Very Good
670-739 Good
580-669 Fair (below average)
579 and lower Poor

 

How does your credit score affect your student loans? If you’re trying to borrow money for college, most federal student loans will not look at your credit—in fact Federal Direct PLUS loans don’t require you to share things like a bankruptcy—but private loans usually will. If you or your parents are applying for a loan like those offered by your credit union and Credit Union Student Choice, your credit score will help determine whether you’re approved and the interest rate you’ll pay.

How can you find out what your credit score is? There are three services that calculate and report your score: Experian, Equifax and TransUnion. Although you’ll find plenty of ads promising a free credit report, watch out: many services charge a fee and some might sign you up for an ongoing plan (ka-ching!). A good place to go for free reports and information is AnnualCreditReport.com.

Is there any way to improve a bad score? You’ll be relieved to know the answer is “yes.” Pop over to FICO for tips on repairing and improving your score.

Can you get credit if you don’t have a credit score? Never borrowed money before? Getting credit can be tricky, but these five ideas from NerdWallet can help.

 

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