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What is a Credit Score?

What is a Credit Score?

Your credit score is a three digit number between 300 and 850 that gives certain organizations an idea of your credit worthiness.  The higher the score the better.

This credit score is derived from algorithms developed by different companies, with the main one’s being and VantageScore.  These companies take reports that are developed by credit bureaus who track your credit across different accounts on a monthly basis.

You may be familiar with the three main credit bureaus if you have ever gone to check your credit in past.  These include Experian, Equifax, and TransUnion.

Because not all activity is always reported to each of the credit bureaus, you may find that your credit report and score can be different depending on which one you check.

Why is a Credit Score Important?

Your credit score is important because it dictates whether you will be able to get lenders and other financial institutions like credit card companies to do business with you.  It can also effect the interest rates a person pays for the same product as someone else with low score holders paying a higher rate.

Who Uses Your Credit Score?

Institutions that lend money such as banks, mortgage companies, and credit card companies are going to check your credit score before providing you any type of loan or credit.

Other companies that enter into a business relationship with you, especially those that require regular payments over a period of time are likely to look at your credit.  Home/apartment rental companies, utilities, and also phone companies.

An insurance company may look at your credit score not only to see any risk that you might default on payments, but also because there is a correlation between responsible money managers and overall responsibility in other areas of life.

Lastly, a potential employer may also ask to check your credit score, although they do need to ask your permission in order to so.

What is a Good Credit Score?

According a Experian, a credit score of 740 or above is considered very good, while an exceptional score is anything over 800.  You can fall all the way down to 670 and still be considered to have a good score, but anything below that, and you can expect to have some trouble when trying to get credit or do business with any of the companies mentioned above.

How to Get Your Credit Score?

First you should know that according to the Fair Credit Reporting Act, everyone is entitled to one free credit report each year.  If you have spent any decent amount of time on the internet over the past ten years, there’s a good chance you have seen a number of companies offering to get you a free credit score.

Not all of these companies are created equal, since many of them are only offering to get your credit report for you in hopes of luring you into a monthly credit monitoring fee.  We recommend using AnnualCreditReport.com. They offer the ability to get all three reports from the different reporting agencies.  You can get them all at the same time if you are preparing for an imminent investment, or can space out the reports through the year if you are just keeping an eye on your credit.  Remember, they can be different if a credit item was not reported to all three agencies.

No matter what company you use, be wary if at any point you are asked for a credit card number to get the report.  This is a tell tale sign that you are agreeing to pay a monthly monitoring fee after the first month of access to your score.

Takeaways

Your credit it score is important for many different reasons, and keeping an eye on it is just good practice in a day and age where identity theft is prolific.

Maintaining a good credit score is key to your ability to getting the loan and credit you need.  It also has the potential to save you hundreds if not thousands of dollars in interest dollars on the loans you do qualify for.

 

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