If you don’t understand your credit score and how it’s calculated then you’re in the dark regarding one of the most important aspects of your financial life. Here’s a look at how credit scores work, how they’re calculated, and ten steps you can take to start improving your score today.
With a credit score of 620, your interest rate could be as much as 1.6 percent points higher than if you had a score of 760. Now, you might think it doesn’t matter because, really, there’s not much difference between 3.9% and 5.5 %.
Wrong. For big purchases, like houses and cars, such a seemingly small difference can result in almost unimaginable extra costs over the life of the loan.
Credit scores are compiled by the Fair Isaac Corporation (FICO), and for that reason they’re often called FICO scores. Lenders rely on these scores and the accompanying credit reports to determine your likelihood of defaulting on a loan. When you apply for a loan, the bank or lender will pay one of the three main credit bureaus (Transunion, Experian, and Equifax) to obtain your report.