What Do Credit Scores Mean to You?

Before answering the question, "What do credit scores mean?" we'll have to cover a few basics about what a score is, what goes into creating it, and why knowing it should be part of your personal finance management plan.

By far the most common score used today is the FICO® score. The Fair Isaac Company created the FICO score in 1956 as a method to determine the creditworthiness of an individual.

Put another way, your credit score is a mathematically determined number based on a number of factors about you and your credit record that tells anyone who purchases the score how risky it is to lend you money.

Your FICO credit score will normally range between 300 and 850 with a higher score meaning less credit risk for a lender and a lower score more.

Money lenders of all types use your score as a way to decide not only if they will lend you money but also how much interest you’ll pay. Certainly that is reason enough to know the answer to the question, "What do credit scores mean?".

Credit Scores Make Loans Fast

The bottom line here is the ease with which lenders can access your credit status without having to read a full credit report or review your credit history. They simply use your credit score number to determine your credit worthiness.

That's why people with good credit scores can walk into a car dealer and drive out with a new car in short order, even on a Sunday afternoon. If an auto lender actually had to verify all your information before selling you a car they'd sell a lot fewer cars.

Understanding Your Credit Score

Although the Fair Isaac Company uses proprietary information and advanced mathematics to calculate an individual credit score the basic components that make up a score are known.

For someone with an established credit history your payment history will make up about a third of your score. Most types of loans, these include credit cards, store accounts, auto loans, installment loans, finance company accounts, and mortgages, will be tracked to see that you are paying, that your payments arrive on-time, and that you have no late payments or delinquent accounts.

Next on the list is the amount you owe on your current loans whether they are credit cards or a mortgage loan. Things that will weigh in here are how many accounts you have, the balance on each one, and the total of monies owed. Other factors taken into consideration are how much you paid off on the installment loan for your auto or whether any revolving credit line you have is near the maximum. The amounts of money you owe account for just under a third of your credit score.

Another fairly large portion of your credit score, about 15%, is based on the length of your credit history. Things that get looked at here include how long your first credit account has been open, how long since your last account was opened, and how long it has been since you’ve used some of these accounts.

The last two parts of your credit score are determined by your new credit and the types of credit you use, each accounts for about 10% of your overall score. New credit means how many new accounts have you opened, how long since your last credit account opening, and how many inquires into your credit have been made. Your types of credit score revolves around having a mix of loans.

Things That Are Not Part of Your Credit Score

• Your race, color, creed, national origin, sex, marital status, or religion.
• Your age.
• Where you live.
• Your salary, occupation, employer, or employment history.
• Requests for a credit score made by you, an employer, or made without your knowledge.
• The interest rate you’re being charged on any particular loan or credit account.
• Spousal or child support obligations.
• Information not found in your credit report.

What Do Credit Scores Mean? Good Deals for High Scores

Here is the bottom line on what do credit scores mean and why your personal finance management plan should include knowing your score. Basically good credit scores get good lending deals while fair or poor scores end up paying far more for credit. Almost half the people with credit scores have a very good credit score.

A score of 720 or higher has been determined to be the break point for getting the best loan deals or not. If you have a lower score it may take you longer to get credit approval, you will likely get offered less than the best deals, and will you will undoubtedly pay higher interest rates on debt.

Now you can get your own FICO credit score here.