If you're seeking to be a financially healthy individual, one of the things you want to make sure you have is a good credit score. A good credit score is the key to unlocking affordable, accessible debt. You may not have realized it, but credit and debt are two sides of the same coin. In order for you to take on debt someone else has to issue it. That someone else is a creditor and they offer credit to you, the debtor. A credit report is like a debt report card. It includes things like your current outstanding debt, how consistent you are in making payments on debt, where you live, and whether or not you’ve been sued, arrested, or have filed for bankruptcy. It is compiled by a credit agency who then provides the report to potential lenders who are trying to decide whether or not to lend you money.
A credit score is based on the contents of the credit report. There are a number of different companies that calculate scores using slightly different methods, each resulting in a score typically between 300 and 850. A score higher than 700 is considered good. An excellent score is one higher than 750. A score of 550 or below is cause for concern. A good credit score can make all the difference when it comes to renting or purchasing a home. A good credit score helps assure landlords that you are a responsible renter and will make your rental payments on time. Likewise, a loan officer views a high credit score as reassurance that you will pay back your loan, making them more likely to give you a lower interest rate on your loan.
FICO is a brand name for a credit score (like Kleenex is a brand name for tissues). The term comes from the company Fair Isaac Corporation who created credit risk scoring in the 60s. If you've had a line of credit for at least 6 months that also reports to the credit bureau, you are eligible to obtain your FICO score. You can improve your score by making sure to pay off the balance of your credit card each payment period and by paying the rest of your bills on time. The longer you've demonstrated financial responsibility, the better your score will be.
As a consumer, you are entitled to one free credit report from each of the three main credit reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. After that, you can pay for additional reports. It’s a good idea to run a credit report for yourself at least once a year to check for signs of identity theft. To obtain a free report go to www.annualcreditreport.com.
(This article was originally published April 19, 2017 on our sister site The Cupcake Club).
Credit Sesame. “Guide: Credit Score Range for Experian, Transunion, Equifax.” July 26, 2016. https://www.creditsesame.com/blog/credit/credit-score-range-for-experian-transunion-equifax/
USAGov. “Credit Reports and Scores.” August 30, 2016. https://www.usa.gov/credit-reports.