Learn How To Use Your Credit Score Scale

Where do you stand on the credit score scale and what does it mean? Let's take a look.

If you've ever tried to borrow money for a new house or a new car, or tried to get a new credit card with a better interest rate, you undoubtedly came across your credit score. This little three digit number can have a HUGE bearing on your ability to borrow money, the rates you pay, or to be accepted for certain applications.

It is of the utmost importance that you understand all about the credit score and the credit score scale on which it's tabulated. I repeat, it is extremely important how this number can affect your life.

• The credit score scale ranges from 300 to 850 in the U.S. In Canada it ranges from 300 to 900 (must be the exchange rate). The higher the number, the better your score, so you always want to see that number increasing.

• Anything under 450 on the credit score scale is considered bad credit, and you will have significant trouble acquiring loans or good interest rates. Now that doesn’t mean that unscrupulous lenders won’t prey on you knowing that you have few options, and will have to accept an exorbitant interest rate.

• Between 450 and 650 on the credit score scale is considered the middle range. You may be viewed as a risk but an acceptable risk to certain organizations. Depending, however, on your exact score you can be treated very differently. So the goal is obviously to stay above 650!

• If you have a score above 700 on the credit score scale you are considered to have good credit, and will have far fewer problems applying for loans or better interest rates.

Other credit factors can affect your score big time. This example is simplistic but it will suffice for our discussion.

Out of 100% of your credit score rating, 30% of your score is attributed to the amounts that you owe. 10% of your score reflects the type of credit you are using. 10% of your score ia allocated to new debt. 15% of your score is allocated to the length of your credit history. And finally, 35% of your score is allocated to your payment history. Add it all up and you have 100%, and ultimately your score, good or bad.

...and rightfully so since they are actually quite complex. We discussed in the bullets above that there are many more factors besides paying your bills that come into play. To begin with, your credit score is actually determined from three different sources, namely Equifax, Experian and TransUnion.

Paying your bills, and paying them on time, certainly does factor into your credit score. We all know that right? But they also check on how much debt you have compared to how much room for more debt you have. This is basically a ratio of your current debt owed compared to your credit limits.

You want to have as much room as possible, which shows a more responsible use of your debt and credit limits. But conversely, with the banks, if you have a $10,000 limit on your credit card and you are only carrying a balance of $1,000, they look at it like you may, at any time, use the remaining $9,000.

So as far as the banks are concerned, when they assess you they automatically calculate your debts including all the room you have left on any credit you currently have available to you. This may explain why you may have been turned down in the past for a loan.

Another thing that factors into your credit score is how many applications or checks have been run on your credit recently. Lots of inquiries into your credit show up as warning signs and will definitely have a negative effect on your score.

I hate to ask you to do this but, try to look at it from their perspective for a second. You, the customer, just look worrying to them as you apply all over the map for seemingly any credit you can get. Suppose you had an uncle or friend asking everybody they knew for money. For most people, red flags would certainly go up in their mind. I know it would for me.

While all of this may sound complex, and it is, that’s not the important thing. What’s important is that you understand how all these factors inter-relate with your total credit score. It’s more important for a consumer like you and I to understand that there is a thing called a credit score and that it can really hurt you financially.

You don’t have to understand how electricity works to know that sticking a screwdriver into a socket is not a good idea. We all just need some guidelines for use, that’s all.

On the bright side, like a haircut, nothing is permanent. You can always and should work on improving your current situation/score. I go into greater detail in my book Common Sense Debt Secrets, but the basics are here. You now understand the credit score scale, have enough information to make a better decision financially, and understand how that financial decision can affect your credit score. :)