Credit score Q&A: “What does your credit score mean?”
Put simply, a credit score summarizes and represents your credit history in numerical form.
And your credit history measures the likelihood that you will become delinquent on a credit line in the future, which is the main issue prospective creditors are concerned about (because it costs them money!).
Prospective creditors can reference your credit score quickly to make a lending decision. And often have credit scoring thresholds for their products, meaning if your score is below a certain level, you won’t stand a chance of getting approved.
Low credit score = high chance of default
On both credit score scales, the lower the number, the higher the likelihood of future default.
And by default, I mean missing a payment, or a second, third or fourth payment. The more payments you miss, the lower your credit score. As you can see, it can be a bit of a downward spiral.
Of course, you don’t need to miss a payment to have a deflated credit score. Those with high outstanding balances and limited credit history may also have below average credit scores.
Highest Credit Scores Represent Lowest Risk to Creditors
Conversely, those with the highest credit score possible indicate to potential creditors (banks and lenders) that they have the lowest risk of default.
As a result, these consumers generally receive the best terms (lowest interest rates) on their credit cards, auto loans, and mortgages, and also stand the best chance of approval.
*In order to obtain a high credit score, it is recommended that you make all your payments on time, keep balances low, and apply for new credit only when necessary. It’s actually pretty straightforward.
Meanwhile, those with bad credit scores are often subject to inflated interest rates and have a good chance of being denied when applying for a loan or a credit card. Or must settle for credit cards reserved for those with bad credit, such as secured credit cards.
That’s why it’s very important to know where you stand long before applying for a major loan, as it can mean real money out of your pocket, month after month. And a lot of it!
What Does It Mean If My Credit Score is Low?
So if you obtain your credit score and find that it’s not where it should be, take measures to improve your credit score immediately.
This usually starts by getting your hands on a credit report to determine what’s holding you back. It may be that you’ve missed a payment, or worse, have an account in collection or charge-off status.
In any case, it’s imperative to get to the bottom of it in a hurry, as you’re basically throwing away money on a daily basis if your credit score is below average. And running the risk of getting denied when applying for future loans.
And remember, a good credit score doesn’t happen overnight. It takes time to improve it, so start early if you think you’ll be applying for major loans anytime in the near future.
Tip: It takes time to build excellent credit because time is one of the many scoring factors.