We’ve all gone to school, so let’s use a report card and GPA analogy to describe the world of credit reports and credit scores. Let’s take you back to middle school (sorry if this is painful).
Your English, Math, and Science teachers are like the credit union, government and a private company. They report to the school administration how you’ve performed on homework, quizzes, and tests.
The school administration is like the credit bureaus- they collect the information from the teachers and create a report card (or a credit report).
What’s more, school administration takes the A’s, B’s, C‘s from the report card and create a numerical GPA. Similarly, credit bureaus take the information they’ve received and create a numerical credit score.
However, instead of the score being based on homework and tests, it’s based on your track record for paying back money you owe.
Continuing the Analogy
Here’s how that credit score (or GPA) affects you:
Next year, the teacher looks at your report card and GPA and as you are “D” student the teacher suspects you probably won’t be turning in your homework and you might not show up to class.
Similarly, the credit union that pulls your credit report and sees a poor credit score thinks there’s a good likelihood the borrower may make payments late or not pay at all.
The impact of GPA could mean not getting into the college you want.
The low credit score means you might not be approved for loans or, if you do, you pay more interest. It can also mean higher insurance rates, getting denied a job and create rental challenges.