What Are Credit Scores Used For?

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What Are Credit Scores Used For?

You know you should check and track your credit scores, but you might still be wondering, "What are they used for anyway?"

Lenders want to engage with people who have a history of being responsible with their debt obligations. That three-digit number can impact how they decide whether you're someone they'd like to do business with, how much it will cost to do so and which options they'll offer you.

Your credit scores are meant to illustrate your creditworthiness and can come into play in several key situations. Read on to learn how your credit score may be used in each of these scenarios.

Applying for Credit Cards

When you apply for credit cards, companies usually review your credit score as one of many factors to help determine whether to approve your application. The formula each company uses is a heavily guarded secret, so the exact impact will depend on which company is reviewing your application. Certain cards have additional perks and a company may decide to offer those benefits based on your credit score. Lastly, companies can use your credit scores in determining the credit limits, interest rates and other credit terms they will offer you. Interest rates, for example, can impact items such as an outstanding balance and cash advances.

Using Financing to Pay for School, a Car or a Home

Most federal loans don't review your credit score during the application process. However, if you apply for private student loans, banks will likely be very interested in your credit report and credit score, which can impact the approval and cost of your loan(s). Similar to private student loans, auto lenders generally look to your credit score to determine whether they will approve leasing a car or allowing you to borrow money to purchase a car, along with which interest rate and timeframe they will offer for either option.

With mortgages, the approval requirements are typically stricter than most other types of financing. Each lender has their unique set of guidelines, but your credit score is a major factor of your overall financial profile. After the most recent housing crisis, some lenders may prioritize credit scores more than they did in the past.

Other Situations

Your credit score plays a significant role in several other situations that you might not expect:

  • Insurance companies are increasingly factoring in credit-based scores when reviewing whether to provide coverage, how much they'll cover and how much they'll charge for it. This can apply to home insurance and auto insurance.
  • When renting an apartment, landlords may use your credit score to determine how much they'll require to be held as a security deposit.
  • If you need the flexibility of a payment plan to buy a cell phone, companies could use your credit score to determine the type of payment plan options you'll be offered and whether they'll require a deposit.
  • Some utility companies might use your credit score to assess whether they will require a deposit and if so, how much they'll request.

Bottom Line

If you will be in one of these situations in the near future, it may be beneficial to check your credit report and credit scores beforehand to verify the information. Get a sense of where you stand by viewing your credit profile on Credit Karma.

About the Author: Jennifer Micieli, CFP® is Credit Karma's Financial Expert. She worked as a financial planner for five years before joining Credit Karma in 2014. Jennifer works with the content and product teams to help members learn how to better manage their finances.

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Compensation may factor into how and where products appear on our platform (and in what order). But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates.

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: ) Very good article! : )

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Thanks! Glad you enjoyed it.

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My concern, is that I'm a recent graduate, whose credit is on thin file, which means for me that odds for employment is under 0%

I want to know for what reason do employers verify candidate's credit, even those that never had any in their lives.

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Hi edgo190. Your credit will likely be one of many factors when being considered for employment. You can learn more about what employers look for in a credit report here: https://www.creditkarma.com/article/job-search-credit-report.

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Does not matter paying for College, in fact, doesn't enter into the equation, I have 6 years College Education, and my Credit Score never came into it at all.....just informing

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