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A Guide to Credit Scores for Beginners

A Guide to Credit Scores for Beginners

You’ve likely heard of credit scores but may not know exactly what they are or why they are important. Maybe you’ve been cautioned about the dangers of having bad credit, or maybe you need a loan but aren’t sure how your credit score factors in. Whether you’ve merely heard the term “credit score” or want to get more in-depth information about this important figure, look no further. Consider this a beginner’s guide to everything you need to know about credit scores.


What is a “credit score?”

A credit score is a numerical value that determines a person’s credit worthiness. This number represents a person’s credit decision-making and lenders review credit reports and other factors, such as loan approvals/denials, to gauge the likelihood of the person repaying debt. As a Credit Bureau standard, a good credit score generally falls between 670 and 739; anything over 800 is excellent.


What is a “FICO” score?

Perhaps you’ve heard of a FICO score. This is a credit ranking developed by the Fair Isaac Corporation (FICO). It is often used by lenders to determine whether they will approve a mortgage or other type of loan. FICO scores range from 300-850:

  • 300-579 is poor
  • 580-669 is fair
  • 670-739 is good
  • 740-799 is very good
  • 800 and over is excellent


Why are credit scores important and what affects them?

Credit scores are important because they could impact a person’s ability to obtain a mortgage, credit card, or other types of loans. Bank officials need to know any money that is borrowed will be paid back; a low credit score typically means a person made some poor credit decisions in the past.

Several common monetary behaviors can negatively impact your credit score, including:

  • Late payments: Lenders want to see that you pay your bills in a timely manner. Late payments (even once when it slipped your mind, or late by even one day) can lower your FICO score—a black mark on your overall credit score.
  • Defaulting on previous loans: Bank loans must be repaid. If your credit report shows negative accounts such as a foreclosure or bankruptcy, your credit can be affected for several years.
  • Relying heavily on credit: One mistake many people make is living on credit—whether it’s maxing out one credit card, paying for an item with multiple cards, or other fiscal actions that can cause you to fall behind on payments very quickly. It’s a classic snowball effect of getting overly excited about your new credit card and spending more than you bargained for, then eventually slipping into bad habits. Plastic is very easy to use and even easier to take lightly. That is, until the bills arrive and payments plus interest sets in start to build. Any financial professional will tell you not to rely too heavily on credit when making purchases. It is important to pay attention to your credit card habits and have them under control so you don’t jeopardize your credit.
  • Applying for too much credit in a brief time: Relying heavily on credit is a red flag for lenders, as is applying for too much credit in a relatively short amount of time. When a customer requests more credit, the lender will obtain a copy of the customer’s credit report (more details on this below). This document contains important information about their financial history, including the number of credit requests the customer has made. A significant number of requests tells the lender the customer is in a poor financial situation, and the lender should proceed with caution for any additional credit approvals.


How to improve your credit score

Even if your credit has been damaged, don’t despair. There are financial decisions you can make to start improving your credit score. Here are a few ways to boost your low credit score:

  • Pay bills on time: Although life happens, as mentioned before even missing one payment for a good or service can have a detrimental effect on your credit score. Make every effort to pay all bills on or before their due date. Live in a chaotic household (and who doesn’t these days)? Put all hard copy bills in a designated “to be paid” area. Or set up automatic payments for monthly expenses. If you prefer electronic bills (eBills), review available services through your financial institution’s online banking to see if you can set up payment reminders for bills so you can rest assured you won’t miss anything.
  • Use less credit: It can be tempting to break out the plastic for every little expense, which can get you in over your head at times. But if you have a plan in place to budget your spending and have an immediate payment plan, then you can ease the risk of falling into debt. Another option is to keep one credit card for emergencies only (and to resist temptation even further, don’t carry it in your wallet at all times). If you feel like a regular credit card is not for you yet, then there are other options you have to build up your credit first.
  • Commit to paying back loans: Set up a reasonable payment plan to ensure your loan is a regular monthly expense. When creating a budget for your repayments, it is important to review the terms of your loan. Once you fully understand the conditions of your loan, you can start by evaluating your lifestyle to see where you can make some adjustments. If repayment becomes too overwhelming, remember, none of this has to be done alone. Talk to your financial institution for assistance and possibly think about consolidating your debt to simplify your payments.


How can you monitor your credit score?

A credit report is the easiest and most effective way to monitor your credit score. It is a summary of your financial history, and lenders review it closely when considering applications for loans or additional credit. Credit reports are available for free from ExperianEquifax, and TransUnion—three national credit reporting agencies.

According to the Federal Trade Commission’s website, an individual is entitled to one free credit report every 12 months from each reporting agency. Order online at or call 1-877-322-8228 to get a copy.

Other top rated free credit monitoring services include Credit Karma, NerdWallet, and myBankrate.


What to look for on a credit report

Credit reports are helpful for several reasons. First and foremost, they include a customer’s credit score as well as financial history so the customer can monitor how it changes (or not) from year to year.

Credit reports include the customer’s basic identifying information, such as name, address, and Social Security number. If you have any questions on your credit report, our Q&A section might have your answer. Review this information carefully to ensure it is current and accurate. Mistakes do happen. For instance, Jon Smith may have credit information on his report for his father, John Smith. Perhaps John Smith opened a credit card account several years ago, but due to the similar names, his financial activity appeared on his son’s credit report. Contact the issuing credit reporting agency to correct mistakes or address disputes.

Good credit is essential for maintaining solid financial footing. Don’t let one missed payment or an error on your credit report leave you on shaky ground. When in doubt, contact one of our banking experts to get you back on track.


This article is for general information purposes only and is not intended to provide legal, tax, accounting or financial advice.  Any reliance on the information herein is solely and exclusively at your own risk and you are urged to do your own independent research. To the extent information herein references an outside resource or Internet site, Dollar Bank is not responsible for information, products or services obtained from outside sources and Dollar Bank will not be liable for any damages that may result from your access to outside resources.  As always, please consult your own counsel, accountant, or other advisor regarding your specific situation.

Posted: March 08, 2021