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Credit Score: What Does it Mean?

Posted by on Friday, March 18th, 2022 in Blogs
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So you just got a copy of your credit report and see a score that ranges from 300 to 850, but what does that score actually mean? The credit score is an accumulation of all of your credit history put through an esoteric algorithm to produce a number that may seem meaningless. However, the score is very important and it does affect whether you will be able to secure a good loan or not.

So what’s a good score? What’s a bad score? Let’s go over what the basics mean. In short, this is what the ranges are and how creditors look at them:

 

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  Looking at the scale, we can notice that the range for “bad” to “fair” credit is 380 points while the “good” to “excellent” range is 170 points. That means the biggest part of the whole range of 300 to 850 is considered bad credit. That’s crazy right? But it seems that creditors and lenders look at these scores to understand the trustworthiness of the customer, which is why they check your credit history.

According to Experian, the average credit score in the United States is 711, which is pretty good. Only 22% of United States citizens have a score of 800 or higher, which is the highest range. This 22% is made of older Americans and wealthier people. On the opposite side, 11% of Americans have a score below 550.

A good credit score can mean a big difference when it comes to obtaining a new installment loan of any kind: car or mortgage. The difference of 100 points in a person’s credit score can mean big bucks down the road.

A Real World Example

Some of these scores may seem intangible, so let’s look at possible real-world examples to see how it really works.

Let’s say that two people are going to a car dealership to buy a brand new sedan. The car costs $25,000, so both people will need to get a loan. 

The first person, Samantha, has a good credit score. When the dealership checks her credit history, she has an average score between the three credit bureaus of 730, which is considered “very good” to most creditors. When the lender sees that she’s a reliable and responsible person who keeps up with her credit, they offer a car loan with an Annual Percentage Rate (APR) of 3.65% (based on national averages). Let’s say the loan is over the course of five years (60 month term), and there’s no associated fees or down payments. Breaking this down, it would look like this:

 

Since Samantha has good credit, she got a good loan and only ends up paying $2,388.50 extra over the course of 60 months.


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On the other hand, Brad, who has bad credit, wants to buy the same car for $25,000. His credit score is 599, which is considered “poor” by the standards of the creditors. When he’s at the car dealership, the dealership pings his credit history multiple times. People with bad credit will incur far more hard inquiries on their credit report due to the car salesman trying their hardest to get Brad inside his new car. The salesman will look for any lender that would accept Brad’s bad credit. The salesman finally finds one and offers a loan. Again, let’s say it’s a five-year term loan (60 months) but at an APR of 17.74%. Let’s break that down:

 

Because of Brad’s bad credit, he’s going to have to pay $12,878.30 in interest alone. That is 34% of the total payment of $37,878.30! Samantha is the clear winner here as she has good credit and ends up paying far less, but Brad is paying $10,489.80 more than Samantha for the exact same car. A person can buy a cheap, used Toyota Corolla for that $10k! This is where credit score and history come into play when determining a loan or finding a lender. Keep in mind that these numbers do not include any down payments or additional fees (such as title or transaction fees).

 

 

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