Why Your Credit Score is an Important Number

Why Your Credit Score is Such an Important Number

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Have you ever wondered how you qualified for a loan? Or why you didn't? Perhaps you ended up with an interest rate higher than the one advertised.

Your credit score may be the reason. It's a numerical scale that lenders use to determine your creditworthiness. The better the number, the more likely it is that you will get the credit you want at a desirable rate.

This credit score is often called a 'FICO®' score, named after the Fair Isaac Corporation, a California-based company that developed software to compute the first credit scores. The FICO scoring method assigns a three-digit number ranging from 300 to 850 that can indicate to the lender the level of future risk based on your credit history.

What constitutes a good credit score?

There isn't a single 'cutoff' score used by all lenders, and there are many additional factors besides your credit score that lenders use to determine whether to give you credit and at what interest rate. So it's difficult to say what a good score is outside of a particular lending situation. One auto lender may offer lower interest rates to people with scores above 680, while another lender may use 720, and so on.

Generally speaking, 300-650 is considered high risk, 650-700 is medium risk, 700-750 is low risk, and 750-850 is considered very low risk.

How the population rates

According to the Fair Isaac Corporation, credit scores are typically spread among the population as follows:

32.2% Below 650
13% 650-699
16.6% 700-749
18.2% 750-799
19.9% 800 & Above

Understanding your credit score is the first step to financial success. It's a good idea to also monitor your credit report periodically, which you can do by receiving a free yearly credit report at freecreditreport.com.

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