Credit Score Basics

What is a "credit score"?

Your credit score is kind of a numerical summation of your entire credit history, whether you pay your bills on time, how long you've had outstanding credit and whether you're a good credit risk. That is all summed up in one number on your credit score, and that's the number that creditors usually use when they're trying to decide whether they should give you a loan and how much interest they should charge you. So, your credit score is important.

What is considered to be a good credit score?

Well, there's a company called Fair Isaac which compiles the credit score that most lenders use. It's called the FICO score. Now the FICO score is on a scale, sort of like the SAT scores, from somewhere down around 30 to up around 85. The median score is around 72, so if you're around that score, that's good. Anything over 75 is really good. You don't have to have a perfect score. You don't have to score 85 but 75 and above is great. 72 is the median score and if you're below that, you might want to get your score up a bit, because you will qualify for better interest rates if you do.

What are some misconceptions people have about credit scores?

Sometimes people don't understand what goes into making up their credit score. It doesn't have anything to do with your employment or the income that you earn or the money that you have in your bank account or the assets that you have. It is strictly based on your behavior as a creditor. Do you pay your bills on time? How much money do you owe? Another thing many people may not be aware of is that checking your credit score is not going to affect it in any way. It is not going to be held against you. So again, it does pay to check your credit score at least once a year.