Understanding Credit Scores: An Introduction to Your Financial Reputation
by: holli casto
vp of training and development
Published 2/01/2024
Demystifying Credit Scores
Credit scores are a vital part of your financial well-being, but the whole process can feel like a mystery without understanding what goes into calculating your credit score. To answer, "What is a credit score?" First, you have to know why they exist in the first place. Anecdotally, think of when you're out to dinner with a friend. If they've always paid you back in the past, you'd be more likely to pay for their dinner in the future. This is a very simplified example of how credit scores work.
A good credit score is important to your financial well-being because it makes you a stronger candidate for a loan application when applying for a loan. When you need to make large purchases, like buying a car or a home, you don't have the cash to purchase these things outright. These are situations when you would need to take out a loan. That said, financial institutions will look for assurance that you will pay them back for their loan. This is where your credit score comes in. Your credit score indicates how likely you are to repay the money you owe.
Credit scores look at five elements of your financial history to determine your credit score. These five categories are payment history, credit utilization, length of credit, credit report inquiries, and credit mix. The combination of these categories makes up your credit score.
The Credit Score Spectrum
Credit Scores range from 300 to 850. The lower your credit score, the worse your credit score is. The higher your credit score, the better. It's widely considered that you should aim for a credit score of 700 or greater. Different credit bureaus tend to break your credit score into ranges from poor to excellent based on how low or high your score is. These breakouts vary between bureaus and institutions, that said, FICO breaks out your score as follows:
300-580 Poor
580-669 Fair
670-739 Good
740-799 Very Good
800+ Exceptional
Checking Your Credit Score for Free
Now that you know what a credit score is and what its role is in your financial well-being, the next step is to check your credit score. The good news is you can obtain a free copy of your credit report from each of the three credit bureaus each year. Visit annualcreditreport.com to request your copies of your credit report. This is an easy way to check your credit score for free.
There is also a wealth of free credit checking services. As a P1FCU member, you have access to My Credit Journey in your online banking, which keeps track of your credit score through Transunion with no impact on your credit score. This is possible because My Credit Journey only does a soft pull on your credit score.
Credit is a very important part of your financial well-being. If this is your first time learning about credit, be sure to figure out what your credit score is, and if needed, take the steps you need to improve it. If your credit score is lower than you hoped it might be, don't be discouraged. Knowledge is power, and you now have the ability to improve your credit score.
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