Credit scores: How 3 little numbers rule your life

If you thought grades only mattered in school, think again. A credit score — essentially a grade on your creditworthiness — is a deciding factor in many financial transactions throughout your life.

FICO scores, the most widely used scores, start at 300 and go to 850. Of course, the higher the number, the better. A score of 760 or more is considered the top range, and those borrowers get the best interest rates and terms.

For a $300,000 mortgage, a person with a top score would pay $100 less a month for 30 years than someone with a score of 660, according to myFICO, the consumer division of FICO.

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Courtney Keating | iStock | Getty Images

But credit scores determine more than just loans.

"Look around at your telephone, your car, the house you live in — your credit score played a role in you being able to obtain those things," noted Rod Griffin, director of public education for Experian, one of the three credit-reporting agencies.

To get your score, you can buy one from myFICO for $19.95 or use a credit-tracking site like Credit Karma that approximates your score for free. Another option: Get a credit card, such as Discover or Chase Slate, which includes a credit score with each month's bill.

Here are all the ways that credit scores come into play beyond loans.

Renting an apartment. A landlord wants to know whether you'll pay your rent on time or if you're the type who throws all-nighters. A credit score is a good predictor of those behaviors.

"If your scores aren't good, you might have to pay an extra security deposit," Griffin said.

But don't wait for a landlord to suggest it.

"If you know that credit is an issue, you may be able to help yourself by offering an extra deposit," said Gerri Detweiler, head of market education at Nav, which helps small businesses access financing.

Young renters without much credit history might have a low score, noted certified financial planner Pamela Sandy, founder of Confiance. Parents might want to help out.

"Employers never get your credit scores, but they do get a credit report." -Rod Griffin, director of public education for Experian

"You might need to guarantee the lease to get your kids off and running," she said. "But remember, it's an obligation and you have to be prepared that your kid turns out to be a deadbeat."

After a year of on-time payments, the landlord should agree to remove you from the lease.

Buying insurance. Insurers make money when they don't pay out claims, so their best customers are people who don't file claims. So how is a credit score relevant?

It turns out there's a correlation between low scores and the likelihood of filing a claim, so it's a factor in setting your premium rate for auto and homeowner's insurances (except in California, Hawaii and Massachusetts, where state law prohibits the practice).

"It's used to help them predict insurance losses and can also be used to offer discounts," said Nav's Detweiler.

When you apply for auto or homeowner's insurance, the insurance company generates a special insurance credit score, which is different than your FICO score but has many of the same inputs.

Sandy of Confiance, who is also president of the Financial Planning Association, experienced how damaging a bad credit score can be firsthand. A few years ago her homeowner's insurance policy was suddenly canceled due to a collection notice on her credit report, the result of fraud.

As she scrambled to clean up her credit report, her automobile insurance premium doubled. The episode took three months to untangle and restore her policies to their former premiums.

Turning on the lights and getting a smartphone. If your credit score is poor, you could be sitting in the dark. Utility and cable companies are likely to check your credit score before opening an account for you. You may be asked to pay a security deposit of $50 to $100 to get service, Detweiler said.

Many cellphone plans also require a credit score because they let you take home a phone and pay for it over an extended period. "You're getting a pretty expensive phone upfront before you've paid for it, so it's a form of credit," Detweiler noted.

If you're sporting a credit score in the 600s, you may have to settle for a flip phone or pay for that hot new phone upfront, Griffin said.

Getting a job (sort of). There's a common misconception that employers look at your credit score before extending a job offer. They don't. That doesn't mean they aren't keen to know how you manage your money.

"Employers never get your credit scores, but they do get a credit report," said Griffin.

About half of employers perform a credit check before hiring, according to the Society of Human Resources Managers.

There are some professions, in particular, where your personal finances come under scrutiny. One is financial services. Employers worry that if you are heavily in debt, you might be tempted to dip your hands into the company cookie jar. And if you're managing other people's money, it doesn't instill confidence if your own finances are a mess.

Members of the military must maintain squeaky-clean credit to keep their security clearance.

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If there's something negative on your credit report, Detweiler suggests getting in front of it. "It really helps to be proactive," she said. "Bring it up before they discover it in a credit check."

The good news is that a credit check won't catch you off guard since you have to sign a form allowing it. The bad news: The request often comes well before you've even interviewed for the position, so you might not have a chance to establish a rapport with anyone at the company yet.

— By Ilana Polyak, special to