What Does My Credit Score Mean Anyway?

Reader Question: I know my credit score is important for getting a mortgage loan, because I hear that all the time. But what does my credit score mean and where does it come from?

We recently posted a response that explains where your score comes from, so that's a good place to start. It answers the second part of your question. So in this post, I'd like to focus on the first part of your question.

What Your Credit Score Means

If you ask 15 different financial experts this questions, you'll probably get 15 slightly different answers. And to a certain extent, they might all be correct. The reason for this variation is that credit scores mean different things to different people. So instead launching into an essay on the subject, let me tell you what your score means to you as a consumer:

What does my credit score mean to me? For one thing, it's a direct reflection of your financial and history responsibility, whether you agree with it or not. Lenders will use your credit score when considering you for a loan, and if it's good you'll have an easier time getting approved. If it's bad, on the other hand, you'll have a much harder time getting approved for a loan. You'll also pay a higher interest rate than somebody with good credit.

Have you ever seen a commercial from a car dealer or mortgage lender where they offer an enticingly low interest rate? The next time you see one, look for an asterisk mark after the advertised interest rate. Somewhere on the ad, or at some point during the commercial, they will use the phrase "for well-qualified borrowers." Your credit score is one of the things that will determine whether or not you fall into the "well-qualified" category. So in this scenario, your credit score could mean that you qualify for that great rate ... or that you don't qualify for it.

If you can afford to pay cash for all of the major purchases in your life, then your score means a lot less to you. Only when you apply for some kind of financing does it become an issue. But few people can afford to pay cash for cars, homes and other major purchases. So they have to rely on their ability to get loans. Here's what it boils down to. If, like many Americans, you require financial assistance when making major purchases, then your credit score means a lot to you -- or at least it should.

Related Q&A Sessions:

• Is a credit rating the same thing as a score?
• What is a good FICO credit score in this economy?

Hope that helps.