The Importance of Credit Scores

What is a Credit Score?

credit score is a ranking assigned by credit report companies to asses the risk associated with your financial history. Another term often used to describe a credit score is the level of creditworthiness or the likelihood a person will repay debts on time.

The acronym FICO stands for the Fair Isaac Corporation which came up with the common credit rating system widely used in the United States today. Therefore, when someone says credit score or Fico score, they mean the same thing. Although there are other companies that conduct credit ratings, Fico is the most common one.

Many people do not realize the importance of a credit score and what it enables or restricts you from doing in your daily life. Some common tasks that require a good credit score are:

  • Applying for credit cards
  • Applying for any type of loan
    • Personal
    • Business
    • Student
    • Auto
  • Determining insurance rates for car insurance
  • Applying for a mortgage when buying a house
  • Renting an apartment

We will break down each of these tasks below with more detail.

What are Credit Score’s Used For?

Applying for Credit Cards

Some credit cards offer great rewards or a higher spending limit per month but credit card companies cannot gives these cards out to everyone. They use credit scores to determine the likelihood someone will make their monthly payments on time. There were many horror stories coming out during the 2008-2009 recession of credit card debt piling up as Americans lost their jobs and homes so credit card companies need to avoid those risks by assessing people upfront.


Without a credit score, it is unlikely for you to get large loans from banks for any reason unless you have a good amount of upfront collateral. Collateral can be in the form of existing assets such as a house or car or in the form of future expected assets such as future earnings from a job. Having little credit history or a bad credit score can also lead to unfavorable terms on a loan if you are approved for one. A common downside is a very high interest rate which would cost you much more than what you could have paid with a better credit score.

Signing a Rental Lease

Landlords usually ask for credit history and credit scores to ensure their tenant will pay rent on time and shows some signs of financial responsibility. If you do not have a good credit score, landlords may ask for a co-signer who does have a good credit score or a guarantor to pay for rent on your behalf if you miss payments. Otherwise, if those options do not work, a landlord may ask you to pay for months of rent upfront in cash to avoid risk.

Getting Car Insurance 

Some car insurance companies and plans use your credit score to determine the rates they are willing to give you to purchase insurance. It’s illegal to drive without insurance and you don’t want to pay huge premiums due to your lack of credit history. However, most car insurance providers will factor in age, car, household income and other aspects of a driver over only considering credit history.

How to Build Credit

One of the easiest ways to start building credit history is to apply for a credit card and start using it. There are several ways to get a card that’s meant for someone with little to no credit history:

Open a Joint Credit Card Account

If you know someone with a good amount of credit history who is willing to sign you up as an authorized user, you can get a credit card that way. The primary account holder will act as a of guarantor of the card. If you do not make payments on time, the guarantor will also take a hit with his or her credit score.

Apply for a Secured Credit Card

Secured cards require a cash deposit upfront. The money acts as collateral in case you do not make payments. Typically, the credit limit, or the amount of money you can spend on credit is equal to the amount of deposit you put down. Secured credit cards are used to build credit enough to be able to get an unsecured card which would not require a deposit.

Apply for a Starter Credit Card

If you have a checking account at a bank, many times they may offer a credit card that doesn’t have many perks. However, this is a great way to build credit if the bank has knowledge of your other cash assets in a checking account.

Apply for a Credit Builder Loan

Some credit unions or banks offer credit builder loans where the borrower doesn’t actual get the money from the loan. The loan is held in an account by the lender while the borrower makes payments until they have reached the amount of the loan. Every payment builds credit and at the end of the term, the borrower gets their money back.