This post is part two in the “What’s my credit score?” blog series.

Borrowing money is how many of us make big purchases or cover unexpected expenses when we don’t have the cash on hand today.

The first step is to apply with a bank or other provider (unless you're a MoneyLion Plus member, in which case you can get a 5.99% APR loan whenever you need it, with no need to reapply). From the bank’s perspective, there’s one main question to answer before they give you the loan: “If we extend credit to this person, will we get paid back in full and on time?”

So how do banks decide who is a risk worth loaning to? Mostly, by looking at how dependable you’ve been in the past – have you paid off your loans in full? Have you paid on time? Banks also want to know how much credit debt you already have outstanding.

Where do the banks get all of this information?

There are three competing credit-reporting agencies, TransUnion, Experian and EquiFax, all of which generate credit reports that provide lenders your entire financial history, including how you’ve paid off things like mortgages, credit cards, and car and student loans. You can quickly learn your credit score and track it over time with the free credit monitoring service from MoneyLion.

These three agencies also use their own respective proprietary algorithms to generate your credit score – basically, a three-digit number that “grades” your credit report. This number signals to lenders what kind of a risk you are, when compared with the entire population of other consumers with a credit history.

The most commonly used credit scoring system is the one developed about 25 years ago by Fair Isaac Inc, called FICO. It’s used by all three credit-reporting agencies. FICO scores generally range from about 300 to 850, but some versions can have slightly different ranges depending on the type of loan or credit issued. In addition, some lenders can use a FICO score that they customize based on how they rank various credit-risk factors.

Like most scores, the higher the better. For the most part, anything above 720 is considered “excellent,” while anything above 690 is “good.” Bad credit is widely considered to be anything with a FICO score below 629. Late last year, FICO said the average US consumer FICO score was 695.

Why does my credit score matter?

Creditors are looking at your credit score to do two things:

  1. Decide whether to give you that new loan or credit, and
  2. Determine what terms to offer you
Those with lower credit scores will likely have to pay more money out-of-pocket in interest payments than somebody with a higher score when getting a loan for the same amount. It’s not uncommon for somebody to have an interest rate that’s nearly 2 percentage points higher on a mortgage just because they have a lower score.

Below is an example why your credit score matters a lot when it comes to getting a good loan terms from most banks. However, withMoneyLion Plus, even people with less-than-perfect credit can get a rate of 5.99%.

Adam is paying a $500,000 mortgage off over 30 years at an annual percentage rate of 3.8 percent. He has a FICO score of 810.

Belinda across the street has the same mortgage but her APR is 5.4 percent because her FICO score is 625.

Over the course of 30 years, Adam will pay the bank $838,723 including interest. But Belinda will pay $1,010,755. That’s right – nearly $200,000 more over the course of the loan because of her lower credit score and an interest rate difference of 1.6%!

To find out your credit score and ways to build it, try our free credit monitoring service. Once you sign up on your mobile device have your credit profile right at your fingertips along with our Credit Score Simulator tool that lets you see how different actions can impact your credit score (like getting a new credit card, missing a payment, etc.). We’ll also alert you of any changes in your credit report that may impact your score.