Chances are, you’ve heard of a credit score. Perhaps, you used it to refinance a house, maybe you’ve used it to buy a car, or maybe you’ve only heard about it on commercials. Whether you know a few things about credit score, or hardly anything at all, it’s important to learn, at the very least, the basics. Start with the following:

Why your Credit Score Exists:  The idea for a credit score was first derived during the 1950’s. At this time, lenders really didn’t know what kind of people were safe to loan to and which were particularly dangerous. So, a credit score was developed based on the pattern of a person’s behavior. This included number of accounts, types of accounts, available credit, and the person’s history of paying off their bills. Anyone who had a favorable pattern, became sought after by lenders.

What Credit Score Has Done: Since the invention of the credit score, the use of credit has skyrocketed. The credit score provided lenders with confidence and this caused them to loan more freely to those who had a high score. This also saved them time and allowed them to loan more quickly. The advent of the credit score not only affected consumer loans, such as credit cards, but it also affected home loans and business loans.

At first, the existence of the “credit score” was kept from consumers. They were simply left in the dark as to why they were rejected for a loan. The reasons for this was because a) the financial industry thought credit scores were too complicated for the average consumer and b) they thought that, if the consumers knew their score, they would no longer develop a predictable pattern of financial behavior. In 2003, congress passed a law that said consumers had a right to view their credit score but the Fair Credit Reporting Act had already made that possible.

How Your Credit Score Affects you: When asking how a credit score affects you, it might be quicker to ask how it doesn’t affect you. Simply put, credit scores can alter many, many things in your life. Just as good credit can open up doors and help you get a house, a car, an apartment, furniture, business loans, and even employment and insurance premiums,  bad credit can slam these same doors shut and hinder your well being. Credit scores can even affect how much you are charged. With good credit, you may be offered a car loan with a fifteen percent interest, with bad credit, your interest rate may be nearing 30%!. A bad score not only forces you to pay more overall, but if also forces you to pay more each month.

How Your Credit Score is Determined: Your credit score measures more than just missed payments. It also measures your debt to credit ratio, how much debt you are actually in, how punctually you pay off debt, whether you have any delinquencies, and how many of your accounts are paid in full. Your credit score is very sensitive and doing something minor, such as closing a credit card you no longer use, can drastically alter it.

But, your credit score can also be different from lender to lender. Different lenders use different methods of scoring. One lender may approve you, while another one might not.

Why Your Credit Score Should Be Checked: If we’ve said it once, we’ve said it a hundred times: a good credit score is vital. This makes checking your credit report equally important. Credit scoring isn’t an exact science, mistakes are often made. Most of the time, these mistakes are the result of an error on your credit report. These errors can’t be caught by anyone but you. So, make a point to regularly check your report (you can do so for free) and call into question, immediately, any errors you may see.

Credit scoring might not seem fair, as it rejects one person from a loan and offers another person one with a great interest rate. But, in order to protect lenders, a credit score is the most feasible way of knowing who is most likely to pay back a loan and who is most likely to default. The best thing you can do to make sure credit scores work in your favor is to know how it is predicted, know how you can control it, and most importantly, make sure your credit report is accurate.