You’ve probably heard how important your credit score is. Advertisements for banks talk about them; advertisements for lenders talk about them; “credit score” is all over the place. But do you know what your credit score is used for? In general, your credit score features heavily in any instance you need to borrow money. Read on to learn exactly what your credit score is and specifically how may impact your ability to borrow money, as well as what else your credit score can influence.
What is a credit score?
Your credit score is a number that reflects your credit risk level. The higher the number, the lower your level of credit risk. Meaning, the higher your credit score, the more trustworthy you are and the greater the likelihood you’ll pay back any money someone lends you. Your credit score is not a fixed number. Rather, it’s generated each time someone makes a credit check that includes your score, because it can change every time you make a payment on your credit card, for example. Statistical modeling has been used to determine what factors in a consumer’s credit history have an impact on their behavior, and how much weight each factor deserves. Some of the key factors are:
- Bill payment history, 35% of score
- Level of debt, 30% of score
- Age of credit history, 15% of score
- Types of credit, 10% of score
- Number of credit inquires, 10% of score
This all comes together and generates a number, your credit score. While not the only thing that impacts your ability to borrow money, your credit score is a major factor used by many lenders to determine how risky it will be to lend to you. Note that the percentages above are an estimate and can vary between credit bureaus.
Who has all my credit history information?
There a number of different credit bureaus, but there are three main ones:
There are others, but these three are the ones you’re most likely to encounter. These companies gather information on people from lenders, publicly-available data, and other sources. They then provide that information to lenders or other entities that use your credit scores as part of their business operations. Note that normally you need to sign a document giving someone permission to check your credit history.
It’s important to note that consumers have a number of different credit scores. Remember that statistical modeling used to generate your score? There are a number of different models, industry-specific ones for example. They do use many of the same factors however, and there shouldn’t be wild variation between scores. But as the models used to construct the scores are not identical, there can be differences. For example, your FICO Auto Score includes information regarding your history of making payments on cars. If you’ve missed payments or had your car repossessed, it may lower your score.
How do lenders and banks use my credit score?
Many lenders and banks pull your credit history when they are deciding whether or not to lend money to you. And if they decide to lend to you, it influences many things including what interest rate they may lend to you at, how much money they may give you, etc. This comes up most frequently for things like mortgages or vehicle loans, but can come into play any time you need credit. Applying for a new credit card for example.
Who uses my credit score other than lenders?
There are a few other major users of credit scores and credit histories:
- Utility companies
- Insurance companies
Landlords may use your credit history to determine how likely you are to pay your rent. This, along with things like your income and rental history, help landlords decide if they’ll rent to you. Some landlords demand a minimum credit score before they will rent to you, or require higher deposits from renters with lower credit scores. Alternatively, they may require you to get a cosigner.
Employers may use your credit score to try and assess things like the probability you’ll engage in risky behavior. Some people also believe it can help predict things like whether or not you are likely to call off or do other things people might describe as rash.
Similar to landlords, utility companies can require a credit check before starting your service. Customers with bad or no credit may have to pay a larger deposit.
Insurance companies may use a score that is slightly different from your credit score, but still contains many of the same elements. They use these scores to determine if they will provide you with insurance. They also use them to determine the rate you may be charged.
How can I protect my credit score?
There’s a number of ways you can keep your credit score up.
- Pay debts on time
- Don’t get into too much debt relative to your total available credit
- Don’t have too many pulls on your credit history
- Start your credit history early
Essentially, you just need to be responsible. You shouldn’t take on more debt than you can handle, based on your budget, which you should make if you haven’t. Be sure to pay your bills on time. Not only will you avoid late charges, but you’ll dodge hits to your credit score. Don’t max out credit cards and then try to borrow money from multiple lenders right away.
For something so vital, you’d think there’d be more easily-accessible information about what exactly your credit score is used for. Many people don’t even know what goes into their credit score or how it’s derived. Now you know some of the things that your credit score is used for. You also know some of the things you can do to protect it and ensure that you can take advantage of all the money it can save you. Having an understanding of your credit score and what it’s used for is essential for leveraging it to meet your financial goals.