What is Credit and Why is It Important?

Credit is part of your financial power. It helps you to get the things you need now, like a loan for a car or a credit card, based on your promise to pay later. Working to improve your credit helps ensure you’ll qualify for loans when you need them.

Credit Origins: Reports and FICO Scores
Your credit report is what the nationwide consumer reporting agencies use to calculate your credit score, which is used by lenders to determine your creditworthiness. The three major nationwide consumer reporting agencies are Equifax, TransUnion, and Experian.

What is a FICO Score?
Credit reports are used to generate a credit score. One of the most commonly used credit scoring formulas is Fair Isaac’s FICO score, which ranges from 300 (low) to 850 (high). The higher your score, the more likely you are to be approved for new credit or offered a lower interest rate. Many factors from your credit history are used to calculate your FICO score. The nationwide consumer credit agencies don’t disclose how scores are calculated, so no one knows exactly how they are determined. The agencies may have different data on your credit history, so your score can vary between the agencies.

Your credit scores determine a lot more than the loans you can get and the interest rates you pay. Insurers use credit scores to set premiums for auto and homeowners coverage. Landlords use them to decide who gets to rent their apartments. Credit scores determine who gets the best cell phone plans and who has to make bigger deposits to get utilities.

Credit scores are a financial tool, in other words, but whether they’re a lever or a hammer depends on how good they are.

Take advantage of your good credit

Once your scores near 700 or so, you’re considered a good risk. When they’re over 760, you’re golden. You should expect the best rates and terms lenders have to offer since they’ll be competing hard for your business.

Reconsider your auto insurance as well, especially if your credit has improved substantially since your policy was set up. Your current insurer may not check your credit at renewal time; ask it to re-run your rates. It’s a good time to shop around as well.

With all the money you save, you can make progress on important financial goals such as saving for retirement, boosting your emergency fund or getting out of debt faster.

That’s the real power of great credit scores. Instead of begging for loans, paying too much and trying to make do with what’s leftover, you’ll finally have some options to get ahead.

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