Understanding Your Credit Score – What Those Numbers Really Mean

Are you thinking about applying for credit? Whether you’re buying a new car, getting another credit card, or refinancing your home, one of the first things your lender will do is check your credit score. This score will determine just how quick and easy it will be to get the loan. That’s why it’s always good to know what your current credit score is… before you approach a lender.

What exactly IS a credit score?

This is a number that’s calculated by the credit bureaus to show how credit-worthy you are. It’s based on your past credit history, as well as any current credit accounts you may have.

The three major credit bureaus are Experian, Equifax, and Trans Union. Each one has it’s own method of deciding what your credit score is. Then they use a scoring system to show how good you are at handling credit and paying your bills on time. They all use the same scoring system – FICO – which is an acronym for Fair Isaac Corporation. That’s why many people will use the terms “credit score” and “FICO score” interchangeably.

Don’t be surprised if your lender just gets a credit score from one credit bureau, instead of all three. This is not uncommon. Since all three bureaus follow the same scoring system, they will likely be giving very similar scores. For example, if Experian gives you a score of 710, Equifax and Trans Union scores should be in the same range. Of course, sometimes one credit bureau may have bad info. Mistakes happen, which is why you should review your credit report annually with all 3 credit bureaus. If there is a mistake, take the appropriate steps to fix it as soon as possible.

What Is A “Good” Credit Score?

Your credit score can range from 375 to 900 points. The higher the number, the better you are. Getting credit will be easier, and you’ll likely get better loan terms as well.

There is no standard scoring system that lenders must use when approving loans. They each have their own guidelines and cut-offs. But here is a general idea of the different ranges credit scores tend to fall in.

If you have a credit score of 650 and above, you probably have a very good credit history. Because you’ve been responsible in the past, you will probably find the approval process is quick, easy and painless. An added bonus is that your loan terms and interest rate will probably be very good.

If your score is between 620 and 650, you are considered to have generally good credit. That said, your lender may ask for additional documentation or explanations before approving large loans or extending a high credit limit. They are simply doing their due diligence, looking for any possible credit risks before final approval.

You may also find that your loan will take longer to finalize. Even so, chances are good that you are able to get approval at a good credit rate.

Don’t panic if your credit falls below 620. It doesn’t mean you will never get credit. The right lender may still be willing to give you a loan, but you need to accept that your interest rate will likely by higher and terms won’t be as good.

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