A credit score is that little 3-digit number that follows you around for your entire life. It’s critical because whenever you apply for any kind of credit, including renting an apartment, the first thing the lender will do is check your credit score. If you have a bad credit score, you may be denied that credit card you applied for, an auto loan or an apartment.
How your credit score is computed
There are three credit-reporting bureaus. They are TransUnion®, Experian® and Equifax®. They all amass information from every place where you have credit or have applied for credit. They then crunch it to produce your credit score. Each has its own formula for computing your credit score. These formulas are based in part on your FICO (Fair Isaac Corporation) score, which combines your payment history, credit utilization, credit history, credit inquiries (how many times you’ve asked about getting credit), and credit type.
These formulas are very closely guarded. Since each of these bureaus uses its own formula for computing your credit score, you can actually have three different credit scores though they should be comparable, plus or minus several points. In fact, if you were to get your credit scores from all three of the credit reporting bureaus and find that one was 50 points different from the others, you should definitely look into this as someone has probably made a mistake or some kind of error.
Good and bad credit scores
Here in the US, credit scores range from 300 to 850, with 723 being the medium score of all Americans. The short answer to the question, “what is a good credit score?” is 760 or higher.
The impact on the interest you pay
Your FICO score will even have an impact on the interest rate you pay on a mortgage and other kinds of credit. If you have a score of 760 to 850 you might pay 4.61% interest on a loan, while a person with a score of 620 to 639 might pay an interest rate of 6.2%.
Keep track of your credit score
Since that little 3-digit number can have such an impact on your life, it pays to keep track of it. You can get your FICO score online from the Fair Isaac Corporation. The Fair Isaac site is called myfico.com. The basic FICO package, which costs $19.95, gives you your FICO score, a list of factors affecting your score, and TransUnion and Equifax credit reports. If you have a large purchase coming up, or some big issue regarding your credit, you might want to sign up for the service called Score Watch® that will track changes in your score and provide credit score alerts. This service has a free 10-day trial. However, if you fail to cancel the service within the 10 days (or forget to cancel it), you will automatically be put into a three-month minimum subscription and the Myfico.com site isn’t very good about telling you what this service will cost monthly.