credit score information (Photo: aShatilov/Shutterstock)

What is a Credit Score, and Why Does it Matter?

By Meg C. Hall

Your credit score is powerful. It plays a role in where you live, what car you drive, if you can borrow money and what your interest rates are.

How can a tiny, three-digit number impact so many major decisions and opportunities in life? The Open Door Coalition asked nationally recognized credit expert John Ulzheimer to give us the scoop.

What is a credit score?

“Your credit score is a numeric representation of the information on your credit report,” explained Ulzheimer. “The report is just a collection of information and the score is essentially the distillation of that information.”

The easiest way to think of it, he said, is to imagine your credit report as a test that evaluates how well you manage credit and your credit score as your grade on that test.

How are credit scores calculated?

Credit scoring systems, namely FICO and VantageScore, look at several elements of your credit report to determine your credit score.

“There are a lot of different factors, but they all fall neatly into five categories,” said Ulzheimer. They are:

“Collectively, all the metrics that fall into these five areas are how your credit score is determined,” he said.

What does my credit score mean?

Lenders use your credit score to determine how much money they are willing to let you borrow and the interest rates you’ll be required to pay for using that line of credit. People with low credit scores tend to pay higher interest rates and have less favorable loan terms than those with higher credit scores.

Ulzheimer said that’s why credit scores were created — to evaluate how responsible you are with other people’s money and how much risk you pose a potential lender.

“All credit scoring systems have a stated design objective, which is essentially ‘What is it built to do?’” he said. “The design objective for FICO and VantageScores is to predict the likelihood that someone will pay 90 days late (or later) within the subsequent 24 months.”

Why does my credit score matter?

While credit scores are primarily used in consumer lending, credit can also have a big impact on other areas of your life. Why?

“Because everyone else is watching it,” said Ulzheimer. “It’s not only financially important, but it can also have an influence upon things that you aren’t even thinking about — for instance, how much you’re paying for homeowner’s insurance.”

While you want to be aware of your credit score, it’s more important to pay close attention to the actual information in your credit report.

“Scores change for a variety of reasons, most of which are completely harmless,” he said. “So if you were a victim of fraud, there's no guarantee your scores would change to the extent that it would alert you of some sort of problem. But, if you are monitoring your credit reports, you're going to know exactly what changes and can react accordingly.”

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