Your credit score is a three-digit number lenders use to assess your creditworthiness, or how likely you are to be able to pay back a loan. It can determine, in part, what kind of car you buy or what kind of mortgage you get on a home — and how much you'll pay to finance those purchases.
"A good credit score can save you a ton of money in the long run," Ted Rossman, an analyst at Bankrate, told Grow earlier this year. "Besides your net worth, your credit score is probably the most important number in your financial life, [and] your credit score has a major effect on your net worth."
Here's what you need to know about credit scores.
Your credit score is calculated using data from your credit report. That information comes from one of three bureaus: Experian, TransUnion, and Equifax. There are several credit scoring formulas. The one from scoring brand FICO is the most commonly used.
Your score is based on a number of factors, including your payment history and your credit utilization rate, meaning how much debt you carry compared to your total credit limit. "You shouldn't use more than 30%" of your available credit, Matt Schulz, chief industry analyst at CompareCards.com, told Grow earlier this year. "That's when it starts impacting your credit score."
Credit scores range from an "exceptional" score of 850, to a "poor" score of 300. FICO says the average American has a score of 704, which is considered "good."
Although it's important to maintain good credit, there's no need to aim for a perfect score of 850. "Very good" credit, or a FICO score in the range of 740-799, can be good enough to qualify for the best rates on a mortgage, for instance.
Lenders will look at your score if you request a loan, including a mortgage, car, or private student loan. They use it to decide if they're willing to extend you a loan or line of credit, and to determine your interest rates.
The better your score, the more likely you are to be eligible for the best rate.
Having good credit can also save you money in unexpected ways. For example, a credit score of at least 650 can help you qualify for the best rates on insurance premiums and save you money when signing up for a new cellphone plan.
Your credit score can fluctuate — and there's more than one way to boost it. Here's how to make sure your credit is, and stays, solid:
More from Grow: