Why Credit Scores Matter and What They Mean

July 13th, 2017 | Author:

[Y]ou hear a lot about credit scores when you’re applying for a loan or credit card. You may also hear about good credit and bad credit when you get insurance or rent a vehicle or apartment. With all of this hype about credit scores, why do they matter so much?

A Picture of a Moment in Time

Your credit scores are a picture of where you stand right now with your credit history. A high credit score shows that you have been responsible and are likely to continue to do so. A low credit score shows that you have failed to handle credit responsibly or you have had problems in the past.

Anytime a person looks at your credit score, they are seeing where you stand at that moment. Because credit scores fluctuate all of the time, it may not be a complete picture. However, it is the best indicator a lender or creditor has to determine whether to extend new credit to you.

What Credit Scores Mean

Credit scores have a range. The higher your score is on the range, the better your credit. If your score is low, it means you are a high risk. You have a greater probability of defaulting on an account than someone with a higher score.

When the negative information is older and you have newer information that is positive, it indicates that you have improved the way you handle credit. This is the reason that new information has a bigger impact on credit scores than older information.

You can get your credit reports for free, but you generally have to pay for a credit score. However, some credit card companies and other websites will provide a score that is usually close to the regular scores. It pays to monitor your credit score, realizing that every decision you make has an impact. On the other hand, you shouldn’t worry when your score goes up or down by a few points. That is normal activity. Instead, it is the long-term trend with your score that you should focus on.

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