Where You Fit on the Credit Score Scale

Most adults have heard of a FICO score and know that it has something to do with their credit. But I’ll hazard a guess that most can’t explain how a FICO is calculated or who actually uses it. I’ll also bet that many adults have no idea where they fit on the credit score scale either.

That can be very unfortunate. You see, knowing where you stand with your credit score is one of the fundamental pieces of information you need to know to manage and use your credit correctly. Without it, you're travelling blind. Because if you plan on using credit in the next 30, 60, or 90 days, knowing what your score is today (and knowing what to do with it) can save you money.

The Fair Issac Corporation

Once upon a time there was a company that put together a way of measuring credit worthiness. That company was the Fair Issac Corporation. They reasoned that the credit industry could benefit from one, single, consistent measurement of one’s credit and so they put together a score and a scoring scale. Today everyone just calls it a FICO score which is an abbreviation for Fair Issac Corp.

Of course they didn’t put this together out of the goodness of their collective corporate heart. They built this formula because it was marketable; they sell the calculation and the use of the scores to financial institutions and other businesses throughout the world. Even companies that don’t deal in finance subscribe and use it as a way of screening future employees. It has become rather far-reaching.

The Credit Score Range

The range itself runs from a low of 300 to a high of 850. I’ve never heard of anyone with a score in the 300’s but that isn’t unusual since no one is going to advertise that fact. I have heard of someone with an 840 though. He was self-employed and very well-off. He claimed he no longer needed to use credit in his business because he had built up a large cash reserve. He also said his bank manager constantly hounded him about taking out a business loan.

Most people fall somewhere in between these two extremes. The cut-off for bad credit these days falls around 620. If you’re below that score then you’re considered less desirable than if you’re above it. Every five or ten points you can inch up from 620 improves your credit standing. And if you can reach 700, you’re mostly welcomed with open arms.

Why Your Score is Important

It’s not that I’m a big proponent of credit but I’ll admit that your credit score has importance. It’s important in the sense that it helps you save money if and when you use your credit. Let me explain.

When an underwriter looks at your loan application and your FICO score, they assess your risk, i.e. the chance that you won’t pay back your debt. The greater the risk, the more the bank or lending institution wants to mitigate that risk by changing the loan terms so that they’re more favorable to them and less favorable to you. That means you’re asked to pay more of a down payment, or you’re required to get a co-signer, or you’re told you must pay a higher interest rate. And it’s all based in large part on your credit score.

Your First Credit Step

Knowing where you fall on the credit score range is the very first step you need to take toward managing your credit. Finding out what that number is can be chilling – you may have no credit to speak of and/or you may find that your score is depressingly low. If it is, take heart. Millions of others have been in that same position (including Mr. 840 who I mentioned above). They pulled, pushed, and squeezed their credit score back into respectability and you can too.

So find out your score. It’s relatively easy to do. Just go to any one of the three major credit bureaus’ websites and get your score for free. By law you’re entitled to one free score each year from each of the bureaus so you could say they’re expecting you. Then, once you’ve studied your credit report and noted your score, you’ll have set the foundation for all of your future credit decisions.