A credit score is a number that helps lenders estimate his or her credit risk by evaluating a person’s credit report. The FICO score is the most common credit score, named after software developer Fair Isaac Corporation.
A person’s FICO scores are provided to lenders by the three major credit reporting agencies— TransUnion, Experian, and Equifax — to help lenders evaluate the risks of extending credit or loaning money to people.
Example of How a Credit Score Impacts Loans
A person’s credit score affects their ability to qualify for different types of credit and varying interest rates. A person with a high credit score may qualify for a 30-year fixed-rate mortgage with a 3.8% annual percentage rate (APR). On a $300,000 loan, the monthly payment would be $1,398. On the other hand, a person with a low credit score, assuming they qualify for the same $300,000 mortgage, may pay 5.39% on the loan, with a corresponding monthly payment of $1,683. That’s an additional $285 per month, or $102,600 over the life of the mortgage, for the person with a lower credit score.
Earning a Good Credit Score
Individuals have to earn their good numbers, and it takes time. Unfortunately, we don’t start with a clean slate as far as credit scores are concerned. Even when all other factors remain the same, a person who is younger will likely have a lower credit score than an older person. That’s because the length of credit history accounts for 15% of the credit score.