Credit Score Definition 101 – Lesson #1

New to Credit Scores? Watch this short overview. In less than 3 minutes, this video will provide you the basics of credit scores.

Companies use a credit score to assess your likelihood of paying whether its to get a car loan, a home loan, a credit card, or even a cell phone.

Credit Score Definition

A quick Google search discovered nearly 20 definitions for “credit score” which highlights how confusing this can get.

To quote myFICO “This term is often used to refer to credit bureau risk scores. It broadly refers to a number generated by a statistical model which is used to objectively evaluate information that pertains to making a credit decision.” Yikes!! Okay, take a deep breath and let’s simplify this.

This credit score isn’t one score at all, it’s 3 credit scores. Why? Because there are 3 companies that collect data on your credit history and create reports. Plus, you may hear the terms “FICO Score” and “Credit Score” used interchangeably. This is sort of analogous to Band Aid and Bandages. Band Aids aren’t the only bandages, but they probably are the ones most people recognize and the same holds for the FICO brand as FICO is the most used credit scoring system.

Next you might guess the score range is 1-100. Nope. Generally it’s a 3-digit number and the FICO system goes from 300-850.

So is it like an SAT score? Yes and No. Yes in that it’s really important. But, your SAT score is set in stone once you’ve taken the SAT. Your credit score changes over time, more like your cholesterol score. Both change as your behavior/habits change!

So how does this impact our lives? Besides the fed rate, this is going to be one of the greatest determinations of your loan payments. At the time of this recording the best rate for a 30 yr mortgage is 5.45%. But the worst rate is over 10%. Today, the best rate can mean $1000/mth LESS in payments for a $300K house. Check out the chart on myfico.com to see what this means for your house or car. One thing is certain, the price of credit score/report products often pay for themselves.

You can increase or decrease your scores through your behavior. But, we are going to focus on upward movement. So, what’s a good credit score? The banks are awarding the best rates to people with a FICO over 760. But wait, if you have 3 scores which one has to be a 760? Well many home loan lenders seem to take the middle score. So if your scores are 710, 720 and 760, they will likely use the mid score to calculate your rate. Most car loan lenders just use one score, but it makes sense to know all three as different lenders use different data sets for their scores.

If you’ve never seen your three scores, that’s the first step, just click on Score Watch ad next to this screen to get started.

In order to start figuring out how to manage your scores, you’ll need to understand what goes into your scores.

There are 5 key areas that impact your score. I’ll cover these in the next lesson #2 – the credit score factors pie.