Why Protect Your Credit Score?

Despite what you may think, it is not completely true that a credit score determines whether you get credit. Instead, credit scores indicate a perceived level of risk, or how likely you are to follow through on the terms of a credit agreement. Because individual lenders follow their own guidelines to define the risk each is willing to accept, protecting your credit score is essential to keep your perceived risk level low and your credit options high.

Identification

The three-digit number, usually between 300 and 850, that makes up your score comes from, but is not part of, your credit report. Each credit-reporting agency takes information from your credit report and according to a mathematical formula, scores your report. Although reporting agencies have the option to use any formula they choose when calculating this number, the Federal Citizen Information Center reports the most common is the FICO, or Fair Isaac Corporation scoring system. Even so, differences in the amount or type of information your credit report contains as well as scoring model variations between individual reporting agencies can lead to differing credit scores among each.

The Facts

Thinking your credit score is important only when applying for a credit card, or making a major purchase such as a house or car is a mistake. A main reason to protect your credit score is the sheer number of individuals and agencies who have a reason to view it. In addition to traditional credit score viewers such as lending institutions, credit card and insurance companies, credit score evaluation is becoming more common for utility companies, rental property owners and prospective employers. At best, low credit scores can result in large utility or security deposits, and at their worst, denial of your rental application or disqualification of your resume.

Credit Score Fluctuations

While your credit score usually ranges between 300 and 850, according to FICO, a good score is 700 or above. With this in mind, another reason to take steps to protect your credit score is the speed at which it can change, especially in a negative direction. To illustrate, the Consumer Federation of America reports that maxing out one or more credit cards can cause an almost immediate reduction of about 180 points, and one late payment can cost you about 130 points. In contrast, six to 12 months of on-time payments can raise your score by about 70 to 180 points.

Effects

Protecting your credit score means being responsible in both getting and using credit. Although each action you take will ultimately affect your score, according to myFICO, certain actions have a greater effect. On-time and late payments have the greatest effect, the total amount of debt you carry comes next and finally the length of your credit history contributes to your score. To illustrate the effect certain actions can have on your score, myFICO provides a number of free credit score calculators on its website (see Resources).

Considerations

Although you can, and should, get a free copy of your credit report every 12 months via AnnualCreditReport.com (see Resources), your report will not include your credit score. However, along with your report each agency must provide instructions on how to order your credit score.