What Does Your Credit Score Mean?

We are often asked about credit scores, the credit bureau and Equifax. We believe that most of the confusion about credit scores comes from miscommunication or second hand information. To further complicate this situation, it takes a Herculean effort to locate or speak to anyone at Equifax. This has caused the credit bureau to appear extremely perplexing and dispensing good scores or bad scores at random. This would cause confusion and anxiety for even the most stout hearted of borrowers.

Your credit score (also known as Beacon score) is merely an indicator to the overall quality of the credit history. It should be noted that not all credit (good or bad) is reported. Some lenders do not report to the credit bureau, or will only report once an account becomes problematic. Some of the factors that can affect your score include the number lenders that look at your credit, also known as inquiries. A common concern is that one or two inquiries will destroy your credit score. This is simply not true. Larger investments such as car or mortgage purchases will require a few inquires and will not adversely affect a credit score. It becomes problematic when there are a series is of inquires over a period of time. This is a warning to potential lenders that you may be a credit seeker – applying for too much credit too fast.

Credit utilization is also an important factor to consider. This is the relationship between the maximum amount of credit you have been approved for and the current amount you owe. For loans and mortgages, this is the total amount of the loan and the current balance after payments. Credit cards and lines of credit work differently, as you can pay down your monthly credit balance. The important tip to remember is that if all of your credit is at the maximum limit, it will act as a warning sign to lenders that you might be overextending your budget. It is recommended to keep your credit utilization at 60-80% of the approved limits.

So why do you want a high credit score? The better the score, the lower the risk you represent to a lender. That translates to more favorable loan terms and conditions. However, don’t worry as much about your credit score as it is merely an indicator. It is more important to stay informed about your credit as this is your credit history. Staying informed about your credit history and what you can do to improve your credit is the truly the best gift you can give yourself!