Credit Score 101: What it is and How it Affects You in Life

By Ankit Agarwal

| Photographs By Jovanmandic

Perhaps the only upside to the recent Equifax breach was that it raised people’s awareness about their credit. Moreover, its significance to their finances. As a result, credit experts at AAACreditGuide advise everyone to check on their credit reports every month.

 

As John Ulzheimer, a credit expert, tells Forbes, the influence of credit scores to your life is too significant to ignore for too long. Hence, the need to be aware of its status on a regular basis. In doing so, you’ll also be able to monitor any changes and spot any potential problems that could affect your finances.

What is a credit score

Investopedia defines a credit score as a number. However, it’s no ordinary number. In fact, it’s how lenders evaluate your creditworthiness. It reveals how capable you are of repaying a loan. Credit scores range from 350-800.

A good credit score you should aim for is 700 or more. At this score, creditors will be more confident in your ability to repay them. However, the usual credit scores of most people are between 600 to 750.

Common types of credit scores

The common types of credit scores used by lenders, banks, and credit card companies, as well as car dealerships, are the FICO score and VantageScore.

Overview of FICO score

FICO is short for Fair Isaac Corporation. The California-based data analytics company was the first to develop the method to calculate credit scores using information provided by credit reporting agencies.

  • It remains the favorite basis used by lenders to decide if you are worthy to receive a loan or credit card.
  • Banks also use it as a basis to approve account applications for checking and savings. It’s also the basis for the rates and terms you’ll be charged.
  • Your FICO score will vary among the three major bureaus – Experian, Equifax, and TransUnion.

Here’s a breakdown of FICO score ranges

  • A very poor rating is between 300-579. At this rate, your chances of getting credit are minimal. On the off chance you do get one, you would be required to make a deposit or pay a fee.
  • A fair rating is between 580-669. You’re classified as a subprime borrower if you fall within this range.
  • A good rating is between 670-739. At this rate, you might be entitled to satisfactory interest rates. Moreover, you’ll have a better chance of being approved.
  • A very good rating is between 740-799. You’re classified as a low-risk borrower. As a result, you have a good chance of getting good rates.
  • An exceptional rating is between 800-850. At this rate, you can look forward to getting the best rates and approvals.

Overview of VantageScore

The VantageScore only came out in 2006, and it was the product of a joint venture of the three credit bureaus (Experian, Equifax, and TransUnion). It aims to provide a more consistent rating for consumers among the three agencies

  • VantageScores are affected by inquiries from a loan or credit application.
  • Your payment history has the most influence on your VantageScore.
  • Your available credit as well as recent credit behavior and inquiries have the least influence on your VantageScore.

Here’s a breakdown of VantageScore ranges

  • A very poor rating is between 300-549. At this rate, it’s not possible for you to get a credit approval.
  • A poor rating is between 550-649. You might get approved for certain types of credit. However, you can expect the rates and conditions to be bad.
  • A fair rating is between 650-699. At this rate, your chances of approval are better. However, the rates you might get will remain unfavorable.
  • A good rating is between 700-749. You can expect to get better rates for credit approvals.
  • An excellent rating is between 750-850. At this rate, you can look forward to getting the best rates and terms with your credit approvals.

How your life can change because of a poor credit score

Three digits tell lenders if they can trust you or not with their credit line. Hence, the significant impact of your credit score on your life. However, it seems not many people know the extent of its influence. In fact, it can affect how much you pay and what you can afford.

It can affect your bills

Banks, cell phone providers, utility companies as well as insurers all look into your credit. If your credit score is low, then you risk being charged higher rates or fees. Likewise, you might be required to make a deposit.

It can affect the type of home you can get

In addition to looking at rent-to-income ratio, landlords also make it a point to look at the credit scores of potential tenants. Why? It’s because they want to make sure you’ll be able to pay the rent, month to month. If your score is low, then renting your dream home would remain a fantasy for you.

It can affect your mortgage rates

A high credit score will enable you to buy a home. Perhaps, even the home of your dreams. However, if you have a low rating, then it would be in your best interest to delay your purchase rather than be charged higher interest rates. Or be denied outright.

It can affect your family

Your personal life doesn’t factor into your credit scores. However, any major decision you make as a couple would be affected by it. For instance, you plan to buy a home or get a loan for a new car. If you have a low credit rating compared with your better half’s, it can affect your chances of getting an approval.

Remember, a lender looks at the profiles of both the husband and the wife. It can get worse if your better half is unaware of your credit score until the lender gives you a high interest rate or denies your application.

It can affect how you earn a living

You should be aware that some states allow employers to run a credit check before hiring a potential employee. They do this as a way to check if you’re a risk of being a thief or an embezzler. Likewise, to determine if you’re reliable and trustworthy enough to be part of their company.

Conclusion

Your credit score can affect your life in more ways than one. Hence, it’s important to know and monitor it regularly to make sure your score doesn’t slip. In doing so, you can prevent any possible problems when it comes to your employment, living situation, and personal relationships. As a result, you’ll have a better chance of living your life in the best way you can without worrying about your finances.


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This article was written by Ankit Agarwal from Getting Money Wise and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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