Money Talks, So Should You

Q&A: What is a credit score?

Mechel Glass
by Mechel Glass, Dimespring Contributor  (@CredAbility)

Your credit score is a three digit number that potential lenders use to determine how much risk they will take if they lend you money.

You can’t always compare credit scores, because several companies produce them using different methods.

The scoring system most commonly used by lenders is the FICO score, created by the Fair Isaac Corporation.

The FICO score is based on five components – your payment history, amount owed, length of credit history, recent requests for new credit and the mix of types of credit you have. Each of these is assigned a weighted percentage that adds up to 100 percent to arrive at your score.

READ: Is it worth it: Leasing an automobile

The FICO score ranges from 300 to 850. People with “good” scores qualify for the best interest rates, are able to sign up for utilities without paying deposits and might get more favorable insurance rates. The number lenders consider a “good” score fluctuates, but generally the closer you get to a 750 or above, the more likely it is you’ll be able to get the best interest rates.

You can find online resources that will approximate your score for free, but to get the official FICO score you’ll need to pay a fee at the myFICO.com website.

So then you’ll be seeing the same score the lenders see, right? Not exactly.

Credit scores are based on information contained in your credit reports, compiled by the three credit reporting bureaus: Experian, Equifax and TransUnion. But each of these credit bureaus has their own version of a credit score they promote. And they each also tweak the score FICO reports to create a slightly different emphasis among the five weighted components.

READ: Top 5 ways to boost your credit score

So when you apply for a mortgage, there is a good chance the lender will consider all three scores. A rule of thumb holds that if all three scores are different, the lender will use the one in the middle and throw out the other two. But that is far from a certainty.

The scores the three credit bureaus promote are not as commonly used as the FICO score. But you should be sure to determine if the score you are looking at is promoted by a credit bureau. Those numbers are not directly comparable to you FICO score.

My advice is for you not to lose sleep trying to determine your exact score. Unless you are planning to borrow a large amount of money, say for a car or a home, your score shouldn’t be a big deal in the short run.

READ: What should I watch on my credit report?

If you know you have a big purchase looming on the horizon, you can take steps to improve your credit score. The quickest way is to pay your bills on time and to pay down your debt.

And if your credit score is so low that you can only borrow money at high interest rates, your best course is to avoid debt until you’ve established a track record as a good credit risk.

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Mechel Glass is vice president of community outreach for CredAbility. She is responsible for coordinating community outreach and financial education activities across the agency’s regions and developing new education programs for both classroom settings and online. Glass, a U.S. Army veteran, is also co-author of “The Veteran’s Money Book,” scheduled for publication in April 2014 by Career Press. The book can now be ordered on Amazon.com.