Although the credit score is the single most important financial number attached to your name, you probably don’t know much about it beyond its impact on your ability to borrow money. Its origins and methods are shrouded in mystery for the average person, but no longer. Here are four facts that pull back the curtain.
1. They Didn’t Exist Before 1989
Today’s most popular credit scoring is only 32 years old. That’s when the Fair Isaac Corporation (FICO) debuted its score system. Before 1989, financial institutions and other businesses mostly made case-by-case decisions based on a customer’s character.
A score-based system was instated to protect people from personal biases. It prevents bank managers from denying you a personal loan or line of credit just because they don’t like you.
That’s not to say a scoring system is without fault. Its opponents point to the discriminatory history of scores against minorities and the disenfranchised.
2. There Are 5 Credit Ratings
In many conversations about credit, people discuss scores as a binary system. You either have good or bad credit.
While the difference between a good and bad score id an important distinction to understand, there’s nuance to these numbers. FICO breaks down its scores into six categories. Check them out below:
- Excellent: 800–850
- Very Good: 740–799
- Very Poor: 300–579
As you can see, FICO has a sliding scale. Someone with a perfect 850 can access the best rates from the greatest number of lenders. As you fall down this scale, you’ll see your rates climb as your opportunities dry up until, at 300, you’ll be hard-pressed to find a mainstream lender willing to grant you funds.
3. You Can Still Borrow on Bad Credit
If your report reveals you have a 600 or below, you may not be approved for the same kinds of personal loans as someone with an 850. However, that doesn’t mean you can’t borrow money. Everyone—regardless of their score—needs help to get through emergencies, so there are options available.
Secured personal loans are one way you can borrow with a low score. These financial products require you to put up a valuable asset to guarantee you’ll pay back what you owe. With something like a car or house pledged as collateral, you pose as less of a risk to mainstream lenders.
Unfortunately, not everyone has an asset they’re willing to bet. If you don’t have collateral, financial institutions such as MoneyKey provide installment loans for bad credit. These bad credit installment loans are a backup when you’re facing an unexpected emergency without savings or an impressive score.
4. You Can Have More Than One Score
So far, this article has focused primarily on FICO scores. While most financial institutions use this as the predominant scoring system, it’s not the only one. VantageScore is the next most popular system, and there are several other specialty models created for specific industries.
You can also expect some variation in your score depending on which of the major credit scoring agencies generates your report. Equifax, Experian, and TransUnion may collect different information from your loan accounts. Any variance in your borrowing history may result in a fluctuating score.
Considering how much the financial world depends on these numbers, there’s still a lot to learn about how they work. Now that you have the facts, you’re just a little bit more informed.
Krishna Murthy is the senior publisher at Trickyfinance. Krishna Murthy was one of the brilliant students during his college days. He completed his education in MBA (Master of Business Administration), and he is currently managing the all workload for sharing the best banking information over the internet. The main purpose of starting Tricky Finance is to provide all the precious information related to businesses and the banks to his readers.