What Is a Credit Score?

At some point in life, nearly everyone will apply to get some form of financial loan. A car, a house, college, or other major purchase or investment may require financing. For that reason, financial institutions depend on credit scores to keep track of individuals’ borrowing habits. Your entire loan and billing history is complied into this number, which can determine whether or not you get loans in the future and how much interest you have to pay on those loans. This number can determine much about your purchasing power.

A credit, or finance, loan is a loan you get from a bank or other financial institution when you want something now but you can’t immediately pay for it. Houses are a perfect example of this type of loan; they are a huge, expensive investment, so it is common to take out a loan to help cover the cost. Over the years the borrower is obligated to pay back the loan with a certain percent of interest tacked onto the principle amount.

Your credit score is made up of several different elements that come together to make this one number. The number is reflective of all the bills you pay and whether or not pay them on time. If you have a house loan and miss some payments, your credit score will go down. If you have a credit card with a balance but decide to not pay for a month, this will also impact your credit negatively.

The most widely relied upon standard for calculating credit scores is FICO, named for the company that helped to create it, Fair Isaac and Company. The main companies that manage credit reports use the FICO method to determine your credit score. Each major company has their own system, but all are based on the FICO system. The below charts show how the FICO system views your credit score. They show the breakdown, according FICO, of credit percentiles and delinquency percentiles.

Even with all these factors affecting your price, there are certain things that can help you get a better deal. Deals will depend on each individual insurance company, so be sure to ask questions! Good-student discounts and accident-free driving records are some of the most common price-cutting deals. Many insurance providers will give you breaks going long periods of time without an accident or fender-bender. A lot of providers will also give special deals, like the ones you see in advertisements. Some are just a small break, but it never hurts to shop around to look for the best promotions.

Your credit score is not just a reflection of whether or not you are paying your current loans and bills; it also indicates to lenders whether or not you are likely to pay off future loans. If you never pay off your loans and have a very bad credit score then it will be much harder to get the loan you want. You may have a much higher interest rate or get a lower limit, or a lender may just decide not to give you the loan at all. This is why your credit score is an important factor in any big future purchases you are planning to make.

But it may still be a bit unclear how this three-digit number that is your financial lifeline is determined and calculated.