A credit score is one of the most important numbers that any person ever deals with. This seemingly simple three-digit number tells potential lenders so much about the kind of history that a person has had with their credit in the past. In other words, this score details the actions or inaction that a person has taken regarding their credit from the past to the present. It can and often does push a lender in one direction or another in terms of making a lending decision.
The news media frequently throws out the term “FICO” score. This stands for Fair Isaac Corporation. This is the best-known company for producing the software that tabulates the credit scores for all borrowers. Someone’s FICO score is a tabulation of a variety of factors related to the way that they have managed their money. It’s not always easy to know everything that goes into this score, but we know that the score itself is critically important.
Credit scores — sometimes referred to as FICO scores because of Fair Isaac Corporation, which created the scoring system — range between 300 and 850. Different lenders may gauge what is a “good” credit score differently. In general, however, credit scores above 720 are considered good, while scores in the 760 and higher range are considered very good or excellent. The higher your credit score, the better chance you have of not only getting a loan, but getting a decent interest rate. Lenders use your credit score to determine your creditworthiness.
The federal government has deemed it so essential to a person’s life that they have access to their credit score that a law exists that says that any individual is entitled to one free credit report from each of the credit reporting bureaus per year. There are three major credit reporting bureaus, and this means that anyone can access their report as frequently as once every four months for free. Accessing it more frequently than that may require payment, but everyone should be aware of the fact that they are entitled to those free reports.
Today, the credit history that a person has is more relevant than ever. All kinds of interactions are conducted related to the use of credit, and lenders and others care deeply about what kind of score a person has. It has always been a factor when borrowing money for something like a mortgage or a car loan, but it is now used for other things as well. Potential landlords and utility companies can ask to see your credit score. It is a big piece of the fabric of what a person is in our society, and that is why now is the time to make this more understood and appreciated. People should not allow themselves to remain in ignorance of what their score is and what it means.
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Your credit score is calculated based on the information contained in your credit report. Some things that factor into the score are:
- Payment history – Do you have any late payments or delinquent accounts?
- How much you owe – How many credit accounts do you have, and what are the balances on those accounts?
- Length of credit history – Your credit score will increase with a good, established credit history.
- New credit – Simply put, are you taking out new debt? This could be unfavorable to a lender, depending on each person’s unique situation and credit history.
- Types of credit – Do you have a lot of revolving debt, like credit cards, or installment loans, like a car loan? In general, lenders prefer to see a healthy mix of the various types of debt.
If you think your credit score isn’t that important, consider this example (provided by myfico.com and published in the Akron Beacon Journal):
A credit score of 680 might qualify you to borrow $200,000 over 30 years at an annual rate of 6.029 percent. At that interest rate, your monthly mortgage payment would be $1,203.
Now, say your credit score had been in the 760 to 850 group, your interest rate would have been 5.521 percent, and your monthly mortgage payment would have been $1,138.
Maybe $65 doesn’t sound like much of a savings to you. But, multiply that $65 over the 30-year life of the loan, and that adds up to an additional $23,400 you just paid for your home because of your credit score.
Remember, you are entitled to a free copy of your credit report from each of the credit reporting bureaus (Experian, Equifax, and TransUnion) each year, but you do have to pay for your credit score, unless you have a creditor that’s willing to show your credit score for free. You can get your free credit report at www.annualcreditreport.com.
It is critical to check up on one’s score often as this is one of the best ways to find instances of fraud. Whenever someone’s identity has been stolen, or there has been some other issue, it often shows up on the credit report faster than it would in some other areas. Thus, one may be able to step in front of the problem and get it solved a lot faster if they pay attention to this kind of thing. Anyone who feels that they may be the victim of fraud or identity theft should get in touch with the proper authorities as soon as possible.
Awareness is a big step in the right direction. It puts a person on the right path towards a healthier financial life and a great ability to control their own destiny. As simple as this score may seem, it has a lot of ramifications that should not be brushed aside. There are a lot of decisions made daily that directly tie into this three-digit number. The sooner that the public becomes educated on this, the sooner they start to work on bettering their financial standing.
