Your credit score represents how well you manage your financial obligations. If you’re confused by these important three digits, you’re not alone: A FICO survey found that one in five Gen Zers reported that they only understand credit scores a little or not at all. In addition, 29% said they either do not have a credit score or do not know if they have one.

 

Yet, understanding your credit score—and striving for a high one—is important since many companies rely on these numbers to understand if you could be a financial risk to them.

 

A good score indicates that you likely pose a smaller financial risk. As a result, healthy credit scores can help you access benefits that include:

• Better interest rates on loans and credit cards
• Lower insurance rates
• Approval for rental housing and maybe even a lower security deposit

What is credit?

Credit is the ability to buy something now, or borrow money now, with the understanding that down the road you will pay back what you owe. Often you’ll be charged interest and fees for this privilege. Being “credit worthy” means you have a history of handling credit well.

 

Ultimately, having access to credit can help you to reach short-term and long-term financial goals. Take loans, for example. Auto loans make it possible to access a vehicle, mortgages pave the way to homeownership, and student loans open the door to higher education. 

 

Credit cards, if handled responsibly, can be another form of useful credit. They give you the ability to make purchases and pay all or some of your bill each month. A third kind of credit is buy now, pay later (BNPL). These arrangements, which have become popular in the e-commerce space, allow you to pay for purchases in installments.

It’s important to establish credit

You might be getting by just fine today by using cash or drawing funds from your bank account to make purchases. But there may be a time that you need a loan or another form of credit.

 

You generally need a history of credit to get credit. Lenders are often hesitant to extend credit to someone who hasn’t yet shown they can handle it well.

 

Fortunately, there are ways to start building credit that don’t require a credit check. For example, you can become an authorized user on a credit card account of a family member. This should be a cardholder who makes timely payments.

 

Alternatively, you can open a secured credit card from a bank. This kind of card enables you to make a deposit that will serve as collateral for charges you put on the card.

 

Another option is to take out a credit-builder loan, which is a low-risk way to show that you can make on-time repayments.

How are credit scores calculated?

Companies that extend credit to you typically share your payment history and your debts with one or more credit bureaus, such as Equifax, Experian and TransUnion.

 

Credit scores are calculated using data contained in the reports of credit bureaus. (Buy now, pay later purchases may not yet be factored into credit scores.)

 

In reality, you actually have many credit scores. One reason is because the credit reports they’re based on may not all contain the same data. Also, there are different credit-scoring companies that use different scoring models.

 

Although your scores may not be identical, they should be in a similar range.

How to find and interpret your credit score 

There are many ways to check your credit score for free. Your credit card company, bank or other lenders may make it available, and so might other entities like free credit monitoring services.

 

Most credit scores range from 300-850. In that range, a credit score of 700 or above is generally considered good and a score of 800 or above is considered to be excellent, according to Experian. The credit bureau adds that most consumers have credit scores that fall between 600 and 750. 

Checking your score is a good financial habit

Staying knowledgeable about your credit score makes it easy to recognize potential problems, like if there’s a sudden drop in your score that you don’t expect. This red flag could signal there’s an error in your credit report or that someone might have applied for credit in your name without your permission. 

 

Monitoring your credit score can also help you plan the right timing for financial purchases that require a credit check. You may want to hold off on applying for a mortgage or auto loan until you see that you’ve achieved a healthy credit score, for example. 

 

Credit scores can feel a bit mysterious. You can discover further insights and knowledge about credit scores in our Learning Center.

 

 

 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, accounting or professional advice. You should consult our personal tax, legal, accounting and professional advisors for advice before engaging in any transaction.