Credit Score 101

Podcast Transcription 

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Hi everyone, I’m your host Maddy with PFCU’s Money Talk Podcast. For this episode, I want to cover some basics about credit score. I know that this topic isn’t the most exciting but it’s one that is always in our faces. It seems like you can’t talk about money or finances without hearing about credit score. So, you might be wondering how can a number be so important? I’m going to answer that question.

First, let’s just start with what a credit score is. It’s a three-digit number that summarizes everything in your credit report. And just in case you don’t know what a credit report is, it’s just basically a financial report card. So, it has information on your credit activity, your credit history and your current situation. So, you’ll see things like your payment history on your credit accounts like credit cards, mortgages, auto loans, you’ll see types of accounts and things like foreclosures, bankruptcies and credit inquiries. This information is what is used to create your credit score.

Okay, back to your score. It indicates to lenders how likely it is that you will repay a loan. Lenders want to know how trustworthy you are- can they trust you to pay back the loan on time? It helps them decide whether they’re going to lend you money. So, I love to give this example in a lot of classes that I teach, it can help create some understanding of what lenders are thinking and how they’re making their decisions. So, let’s imagine that someone asked to borrow some money from you, could be anyone, a friend, a family member, an acquittance, a coworker, would you ask any questions before you let them borrow your money? Some examples that come to mind right away for me include how much money do you want to borrow? Do you plan on paying me back and when? I might want to know what they need it for. Is it for an emergency or is it for a concert? That might make a difference to me. And last, what is this person’s reputation for borrowing money? And this one is a huge one. Do they pay other people back? Do you a have history with them borrowing money from you? What has that experience been like? If they haven’t paid you back in the past, are you going to want to lend them money again? Or have they always paid you back when they said they were going to? Lenders are asking the same things when you apply for credit. They want to know if and when you will pay them back and they use your credit report and score as tools to determine this.

So, what does a credit score look like? Typically, they range from 300-850, a higher number is a better score. According to Experian in the year 2023, the average credit score in the United States was 715 which is labeled as a good score. This is up from 714 in 2022 and 703 five years ago. When I say that the score is labeled as a good score, scores can fall anywhere in the categories from exceptional or excellent to very poor or good depending on the number. You can look up Vantage Score or FICO score to find out where your score falls.  Vantage and FICO score are the two most popular scoring models that lenders use and they calculate their scores a little bit differently, so that just means that your score will likely not be the exact same between the two models but probably only by a few points. And keep in mind that even though a higher number is better, this doesn’t necessarily mean that there’s a hard cut off on who lenders will or will not lend money to.  It depends on a whole lot of factors and variables in addition to your credit score and credit report.

Okay, that was a lot of information, so, I just want to wrap up by talking about how you can get your credit score- that’s a great start. If you apply for new credit like getting a car loan or buying a house, you will get your score. So for example, a few years ago my husband and I, we refinanced our home, we were each mailed our credit scores as part of that process but there are other ways you can get your score if you don’t plan on applying for new credit. Many major credit card and auto loan companies, financial institutions, they are providing credit scores for their customers every single month. It’s usually listed on your statement or in your account, so check that out. There are many sites and services that offer credit scores. But be careful if they say free because they might require you to buy a monthly service so it’s not actually free. Also be careful of those free trials. Not to say it’s not legitimate but if you don’t cancel in time, they’re probably going to be charging you that monthly fee. And we all know how busy we get and we forget about things and then next thing you know, your free month is up and you’ve been getting charged a fee that you forgot about. Like I said, many of these sites are credible just make sure you read all of the terms before signing up or handing over your payment information. You can also get your score from the credit reporting companies, these are TransUnion, Experian and Equifax.  These are all very credible and reliable sources. And this is where you can also get your free credit reports. So, visit annualcreditreport.com to get your 3 free reports every 12 months, one from each of the bureaus. Either all 3 at once, you can do one at a time, it’s completely up to you. Keep an eye on your credit reports regularly to check for mistakes and any signs of fraud. Sometime fraud can be happening and you don’t even know.

Making smart financial decisions starts with being as well informed as possible. And it starts with knowing your credit score and keeping up on your credit report. Alright, that’s all I have for you for this episode of Money Talk. Thank you so much for joining me.

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