What is a credit score and why is it so important??
A credit score is a numerical representation of your credit history and your credit worthiness. When you approach a lender for a loan, be it a new credit card, a home mortgage or a car loan, the lender has to judge how big a risk you are when it comes to repaying the loan. They want to judge your credit worthiness, which helps them to decide whether they should approve your loan application or not. And they do this on the basis of your credit score. Believe it or not, many insurance companies and employers now check your credit score, which can impact your chances of getting a low insurance premium or the job you want!
The income you earn is certainly part of the lending decision, but your credit score trumps all – there are actually millionaires out there who cannot get even a credit card because they have bad credit or lack of credit history. Luckily for them, they are millionaires. The rest of us have to make sure we monitor our credit scores.
The three main credit reporting companies are Experian, Equifax and TransUnion. These bureaus maintain a credit file of every person who has ever borrowed any kind of credit. All your credit information, bank account information, loans, payments, etc. is contained in the credit file. On the basis of this information, a credit score is calculated.
If you have a high FICO score, you will be able to get loans at the lowest possible interest rates and without too much paperwork involved. If you have an average FICO score, you will attract interest rates that are in the mid range and will have to go through additional paperwork. However, if you have a “bad” FICO credit score (generally less than 650), you will find it extremely difficult to get any kind of credit. And the loans that you do manage to get will be at extremely high interest rates.
The Fair Isaac home page translates the effect of a good rating into the language of monthly mortgage payments on a 30-year fixed loan of $300,000. www.myfico.com. As of June 25th, 2008:
| FICO® score | APR | Monthly payment |
|---|---|---|
| 760-850 | 6.153% | $1,828 |
| 700-759 | 6.375% | $1,872 |
| 660-699 | 6.659% | $1,928 |
| 620-659 | 7.469% | $2,091 |
| 580-619 | 9.452% | $2,512 |
| 500-579 | 10.311% | $2,702 |
A consumer with the highest score range of 760-850 with an interest rate of 6.153% would pay a monthly mortgage payment of $1,828.
One within the lower scoring range of 620-659 with an interest rate of 7.469% would have a monthly mortgage payment of $2,091
Every consumer should get a copy of their credit report each year to see that the information reporting on their credit report is accurate. Free copies of your credit report can be obatined directly from the three credit bureaus. Below are the contact information for each of the main credit bureaus:
Equifax
Equifax Credit Information Services, Inc
P.O. Box 740241
Atlanta, GA 30374
To order report: 1-800-685-1111
To report fraud: 1-800-525-6285
Web site: www.equifax.com
Experian (formerly TRW)
National Consumer Assistance Center
PO Box 2002
Allen, TX 75013
To order report: 1-888-397-3742
To report fraud: 1-888-397-3742
Web site: www.experian.com
TransUnion LLC
Consumer Disclosure Center
P.O. Box 1000
Chester, PA 19022
To order report: 1-800-888-4213
To report fraud: 1-800-916-8800
Web site: www.transunion.com
To get credit at low rates and good terms, it is important that you maintain a high credit score. By monitoring your credit score regularly,you will know exactly what your credit score is and can take the necessary steps to increase it, if need be.
