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Your credit score and you
Steps to protect your financial future
Most people have heard financial advisors refer to credit reports and understand that credit reports are important to review from time to time for errors. Fewer consumers understand credit scores and their importance to you when you need to borrow money or apply for credit.
Your credit report is the
file at the three credit agencies that contains all the information and payment
history for every time you have been extended credit. Your credit score is a number based on
the information in your credit report that shows how likely you are to pay a
loan back on time. The higher your
score, the less risk you represent.
It is your credit worthiness distilled into
one number. Hundreds of lenders act on this single
number alone. If your credit score
is not high enough, you will not qualify for their best lending programs. Too low, and you will not qualify at
all.
Credit scores range from 300 to 850. They are based on payment history, length of credit history, amounts owed, types of credit and new credit. The exact formula is a trade secret. Credit scores are sometimes called FICO scores or Beacon scores within the financial services industry. The firm that calculates most credit scores is Fair Isaac Corporation (NYSE:FIC), hence the name FICO.
Your credit score can make a huge difference in the terms you are offered for credit. As we write, the difference for a 30 year fixed rate mortgage is:
Your Credit Score Your interest Your monthly payment
720-850 5.63% $864
700-719 5.75% $876
675-699 6.29% $928
620-674 7.44% $1,043
560-619 8.53% $1,157
500-559
9.29% $1,238
The best credit scores get the best interest rates and the most favorable terms. This example illustrates a $374 difference a month between the top credit score and the lowest credit score, a $134,640 difference over a 30 year repayment. Big bucks!
The same illustration applies to car loans, credit cards, etc. The higher your score, the lower the interest rate you will pay. Period. In general scores above 700 are considered prime and above 720 super prime, but this varies from lender to lender.
Not all lenders will automatically offer you the best terms available for someone with your credit score. Why? The higher the interest rate they charge the more money they make over the life of the loan. That is why it is important to know your score well before applying for credit so you can use a good score to your advantage or take action to improve your score before a major purchase with credit.
Armed with your credit score, you could call mortgage lenders and ask, “what is your best rate for a 30 year fixed rate mortgage with 20% down based on a 710 FICO score.” Now they know they are dealing with an informed consumer! And, if you have done your homework online, you should have a good idea of what the rates should be.
First, you need to know what it is. One fast, easy and inexpensive way to obtain your credit score is at www.myfico.com; where the basic package is available for just $12.95. They offer more expensive packages, but in general we do not recommend them. Credit reports and protection from ID theft are some additional items that www.myfico.com offers. You can take care of those items quickly and easily for less money with just a little more homework on your part. For more information about id theft your can review our information bulletin.
Next, you need to understand things you have done that affect your credit score. You can get more information at some of the resources available online that we provide at the end of this article.
Finally, you can work to improve your score and track it over time. Once you know your score, don’t be bashful about asking potential lenders for it and seeking out the best terms based on your score. In the mortgage table above, just improving your score from 700 to 720 would save you almost $5000 over the life of the loan. That kind of money is worth a little extra work!
www.bankrate.com/brm/news/credit-scoring/20040128a1.asp
www.bankrate.com/brm/credit_scoring_home.asp
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