What Exactly Is Your Credit Score

Your Credit Score What is it and Why is it Important

Your credit score is perhaps one of the most important numbers in your life and chances are you don’t even know it. Many Americans are waking up to the fact that every late payment, every unpaid loan and every repossessed asset they have is causing long term damage to their financial health.

All of your major financial dalliances are recorded in your credit report and reflect on your credit score so that anyone wanting to engage in financial transactions with you can have a measure of the risk that you pose. Most often, it is the lenders who make use of your credit score to get an accurate picture of your financial capacity and repayment ability before they approve a loan you have applied for.

What is a credit score

Your credit score is a numerical representation of your financial health. It is a number that is derived from the entries made in your credit report. This report shows how you have been using credit so far. Any credit card you use, auto loans or student loans you have taken, mortgages for home buying etc will appear here and so will your record of repayments towards these various obligations. Your lenders/ creditors update the credit rating agency with any payments or default in each of your loan accounts.

Based on how well you maintain repayments on schedule, how much debt you hold and its relation to credit that you can avail of, your credit score is determined. When your lender asks for your credit score he is asking for your FICO score, which is the most widely used scoring system in the U.S.

There are three credit rating agencies- Equifax, Experian and TransUnion. Some creditors may not report to all three agencies and this difference is reflected in the slightly varying scores that each of these agencies gives you.

Why is it important?

Your credit score impacts the cost of all credit you take in the future. A lender evaluates the risk in offering a loan to you by looking at your credit score. If your score is low, say about 400, then he makes up for the high risk by ensuring that he gets a high return from you. He does this by setting a high rate of interest on your loan. The same lender will offer the loan to a customer with a credit score of 700 at much lower interest rate. The interest rate determines your monthly outgo for the entire life of the loan. This means that a good score reduces your total overall loan cost while a bad score increases it.

Understanding your credit score and ensuring that it presents a correct picture of your past debts and repayments is critical especially if you are looking for a loan. You can ask for a copy of your credit report through postal mail free of charge or pay a nominal charge to get it through email. Make sure you have your credit report handy before you visit different lenders for your loan.