Credit Score Basics

credit cardYou hear the term credit score mentioned often, but how much do you really know about it?

Credit scores were first developed by Fair Isaac Company – FICO – and FICO is still the most commonly-used credit scoring system. FICO scores range from 300-850; the median score is about 720, which means that half of the population has a higher score and half has a lower score.

Credit scores are designed to predict how reliably you will pay your debts in the future. Lenders rely on them to decide whether to loan you money, and how high an interest rate they will charge.   Not surprisingly, the main factor in these predictions is how reliable you have been in the past.

Implication?  A cash-only lifestyle  may do wonders for your wallet, but it won’t boost your score.  If you rarely or never use credit, your credit score may be very low.

Fortunately, you don’t have to pay credit card interest to achieve a great score.  “Using credit” is not the same as “carrying a balance on your credit cards.”  People who pay off their credit card bills in full every month get the benefit of building a strong credit score, but without the cost of interest. Carrying a balance is expensive and when it exceeds 30-50% of your available credit, your credit score suffers.  An essential key to increasing your credit score is to pay your bills on time.

There is no quick fix for credit card debt.  You may hear or see ads for services promising an immediate repair of credit.  Your credit problem must be determined to be repairable for the companies to accept you as a client.  Repayment may result in added expenses for a service that will duplicate steps you can take yourself.  Changing a due date, requesting lower interest rates, closing the account and agreeing to a repayment plan.

Why does your credit score matter?  It affects SO many things:

  1. Whether you can borrow money in the future and what interest rate you’ll pay
  2. Your insurability and your insurance premiums
  3. Whether you will get hired for certain jobs
  4. Whether a landlord will rent to you

It is not free to check your credit score at , but some credit card companies include it with their monthly billing statements and commercial credit score sites will give you a ballpark estimate.  Scoring methods vary from site to site.   You can check your credit score for a small fee at the same time you check your free annual credit report.  If you are planning to borrow funds for an auto or home purchase, knowing you have a higher than normal score can be a bargaining tool to obtain the lowest interest rate and best loan terms.

– Susan

(Edited 2/2/2020)

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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