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Credit Scores

What is a Credit Score?

A credit score is an evaluation of one's credit worthiness at any given point in time. Your credit score is used by banks and other lenders to determine what type of risk you are to extend credit to. The higher the number the better the "risk" in the eyes of the lender, so they people with higher credit scores are granted mortgage loans, credit cards, other loans, and insurance at the most favorable rates. The credit score is based on your detailed credit report, so you should review your credit report and score often to make sure it is conveying your credit history accurately.

Credit reporting is a huge industry, with the three major credit bureaus--Experian, Equifax and TransUnion--gathering credit-account information on about 210 million Americans every year and selling more than 1 billion credit reports each year, most of them to lenders eager to assess the creditworthiness of potential and current customers. A credit score is given by each of the three major credit agencies. Your potential credit score from each credit bureau could range between 300-850.

What is a Good Credit Score?

The answer to that question varies signficantly depending on the lender you are working with. Typically any score below 620 is considered higher risk or "sub-prime". You can still acquire credit with a credit score below 620, but you will likely pay a higher interest rate than you would if your credit score were higher. The majority of consumers' credit scores fall between 600 and 800. Fair Isaac gives the following breakdown as general credit risk guidelines. (Remember, when it talks about higher risk, it means you are less likely to receive a loan, or if you do receive a loan, it will be at a higher interest rate).

• 781-850 - Low Risk (best interest rates)
• 741-780 - Medium-Low Risk
• 691-740 - Medium Risk
• 621-690 - Medium High Risk
• 620 and Below - High Risk or "sub-prime" (highest interest rates, or denial of credit)

FICO Credit Scores

Fair Isaac has never revealed their complex "secret forumula" used to calculate FICO credit scores, but they have given us some general information about what makes up their score. FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories along with the approximate percentage of the score accounted for with each factor: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). Remember that your credit score is a snapshot of all your personal credit information, so all of the above factors are used to calculate that number. For details about your personal credit history, you should review your credit reports.

In addition to the factors that make up a credit score, Fair Isaac has said that they do not consider any of the following in determining a person's credit score: race, color, national origin, sex, marital status, age, salary, occupation, title, employer, or place of residence.

I've got my credit score, now what?

So what happens once you have obtained a conclusive credit score? Do you really know what this number helps you with in your life? Well here are a few considerations: Obviously a higher number represents a lower level of credit risk; this translates into better rates for you when applying for anything in which your credit is a factor and credit will be issued to you. Credit scores help lenders assess risk more fairly because they are consistent and objective. Consumers also benefit from this method. No matter who you are as a person, your credit score only reflects your likelihood to repay debt responsibly, based on your past credit history and current credit status. Here is a quick list of where credit scores will impact your purchasing power:

• Home loans
• Boat loans
• Car loans
• Applying for a cell phone
• Applying for credit cards
• Insurance

The bottom line is this: The higher the credit score, the more credit is available to you at lower interest rates. (e.g.: A borrower seeking a $300,000 mortgage with a score below 559 would pay about 9.234% interest on a 30-year fixed mortgage, or $2,465 a month, according to Fair Isaac, while the same loan would cost a borrower with a FICO above 720 just 5.515% interest, or $1,706 per month).

Want to get an idea of what your credit score is? Try the Free FICOŽ Credit Score Estimator from MyFICO.com

Or Order all 3 FICO Scores and Credit Reports from all three credit bureaus.