What is a Credit Score? Credit Score Defined

You may have heard the term credit score tossed around from time to time but does it really matter? How is your credit score used and where does it come from? We answer these questions and more.

Definition for Credit Score

Your credit score is a numerical figure that reflects how financially responsible you are with money that is lent to you. A credit score has to do primarily with credit, any debt that you have.

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How Your Credit Score May be Used

Your credit score may be used for a variety of things. 

First and foremost, your credit score is what lenders use when evaluating whether or not they should give you money.

For example: If you want to apply for a credit card, the credit card company will review your credit score to determine how much they should give you. If you have a bad credit score, they might only give you a credit card with a $500 limit and if you can demonstrate that you can use it responsibly and make timely repayments for six months they will increase it gradually. By comparison, if you have a very good credit score they might give you a credit card with a $20,000 limit.

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When you apply for loans, a mortgage on a house, auto loan for your car, or even a personal loan, lenders and banks will look at your credit score to determine a) whether they will approve your loan application b) how much they will loan you and c) what your interest rate will be on that loan.

For example: If you have a very bad credit score and you apply for an auto loan, you might not get approved. If you have a poor credit score you might apply for a $30,000 auto loan but only be approved for $10,000 with an interest rate of 20%. If you have a decent credit score you might apply for a loan and get approval for the full $30,000 with a lower interest rate of only 7%. If you have a great credit score you might have an interest rate as low as 1 or 2%.

There are certain jobs for which you may apply that require a credit report. Any job having to do with money like an accountant or financial officer will probably require your employer to check on your credit score. If you have a bad credit score that is a reflection on poor money management until we are not likely to get a job where your responsibility is handling money.

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Similarly, when you fill out an application for a rental, the landlord can review your credit score to determine how responsible you are with your payments. If you have a bad credit history, they might not rent to you because they don’t believe they can trust you to pay your rent regularly or on time.

More Perspectives on Credit Scores and How they’re Used

Given how important a credit score is, you would think that there would be only one. But that is not true. There are actually three major credit bureaus that receive all information about your credit and use it to create an individual credit score: TransUnion, Equifax and Experian. When lenders or employers look at your credit score they can pick one of these three, or they can review other third parties. 

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CFPB

The Consumer Financial Protection Bureau is a federal agency that ensures you get treated fairly by lenders, banks, and financial companies. If you have a problem with your credit score or your credit report and you were treated unfairly you can work with this department to rectify that. This department focuses on providing education to people like you so that they can make informed financial decisions and prevent abuse of financial practices.

FTC

The FTC or Federal Trade Commission is part of the US government but they work as an independent agency tasked with promoting consumer protection and making sure companies don’t violate antitrust laws. This is another agency to which you can’t earn if you have to report fraud, identity theft, or scams.

USA.gov

Here you can access information about government agencies and information by topic such as information about your taxes, grants or loans, different government agencies or state agencies that monitor your credit or your loans.

FICO

FICO stands for Fair, Isaac, and Company and is a data analytics company. They were founded in 1956 and you might be more familiar with them as they provide your FICO score. Your FICO score is a measure of your credit risk and is one of the scores used by lenders to determine whether they should give you money and what the interest rate should be.

AnnualCreditReport.com

This website is the jointly operated website for all of the credit reporting agencies in the US, Equifax, Experian, and Transunion. Using this site you are allowed to get one free copy of your credit report every 12 months from all three companies without it impacting your score. 

US Federal Reserve

The US Federal Reserve System monitors risks to banking in the United States. They make policy decisions about things like interest rates and monitor the actions of different lending institutions. 

American Bankers Association

The American Bankers Association is an association for the banking industry. It was actually founded in 1875 and today serves for the benefit of all banks including savings associations, trust companies, and even your local community banks. They offer things like research and training as well as advocacy on behalf of bankers and banking institutions.

Equifax

Equifax is one of the three consumer reporting agencies. They collect data on over 800 million people and over 88 million businesses. You can use Equifax to dispute information that you see on your credit score, get a free copy of your credit report, and place alerts for any fraudulent activity. If you use the fraud alert page Equifax will automatically notify Experian and Transunion so that changes can be made when scams happen. 

Experian

Experian is another Consumer Credit Reporting Agency. Experian actually gives you free access to your credit reports once every twelve months. Experian is sometimes used for its credit report because it gives a more thorough background than just a single monetary figure. A FICO score by comparison might simply say 700 but two people with a score of 700 could have very different payment histories, lines of credit, and debt-to-credit ratio. 

TransUnion

TransUnion is a consumer credit reporting agency that collects information on over 1 billion people in 30 different countries. You can review your credit score, get your free annual credit report, dispute problems on your credit, and use credit alerts to protect yourself against fraud. 

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