Decoding Credit Scores

You don’t need nationally syndicated talk show host, Clark Howard, to hammer into your head, the fact that it’s important to keep your credit in good standing; if you’ve been anywhere near a television these past couple of years, you already know the dangers of not doing so. We hear, credit this and credit that, all the time. But, what do credit scores really mean? Not to worry, the answer is coming up in a New York minute.

Know your credit score.
Know your credit score.

Riding the Credit Score Wave

Here’s a little known fact: 63 percent of Americans don’t know their credit score.

According to, your credit score is a measure of your past ability to make payments on time and effectively manage your credit, too.

Moreover, credit scores are designed to paint a picture, to help lenders determine how likely you are to pay back your loan. In essence, your personal credit score is built on and depends on your credit history.

The credit lines sometimes can be blurred, 620 and below, 720 and above. How is your credit score calculated? Interestingly enough, your score is derived by using a formula created by Fair Isaac Corporation, also referred to as your FICO score. Here’s what these scores mean:

620 and Below:

Nobody wants to be denied when it comes to getting the essentials we need, nor do we want to pay more for them; but that’s exactly what can happen if we don’t have good credit scores. A credit score below 620 puts you in the category of a “sub-prime” borrower. If you are approved for a mortgage with a credit score under 620, you more than likely will pay three percent more than someone who has an excellent credit score.

Seeking a home equity loan or line of credit? You can expect  to pay double-digit interest rates. If you make regular payments on the loan, though, and organize all of your finances, you eventually may be able to improve your score. You also may qualify for lower interest rates.

620 to 674:

If you have a credit score of between 620-674, you have a below-average credit score; therefore, your options will be limited. What does this mean? You will pay a premium on your loan, maybe as much as two percent more than borrowers with excellent credit. Over time, making regular payments will work in your favor and actually can improve your credit rating. Also, you should be able to refinance at a better rate, which can save you money over the life of your loan.

675 to 719:

Credit scores fluctuate, they constantly adjust as the information in your credit report changes. But, once your credit score dips below 720, you may no longer be approved for the lender’s best rate. Nonetheless, you should have very little difficulty finding a good loan. How can this impact me? On a 30-year fixed-rate mortgage, expect to pay up to half a percentage point more than someone in the top category.

720 and Above:

According to Fair Isaac, the median FICO credit score in the U.S. roughly is 720. This means that you have excellent credit and are likely to receive a lender’s most favorable rates. Since the ball is in your court, you can shop around and demand the best rates possible.

Looking to purchase a home? Lenders often will allow you to borrow more than 80 percent of the value of your home. They also may not require private mortgage insurance. And, you likely will be able to get a home equity loan or line of credit with an interest rate equal to the prime rate; you may even be able to get a rate below it.

With the day-to-day demands, paying bills on time takes a lot of effort your part. And, this effort should reflect on your interest rates. Search for a lender that will reward you with a low-interest rate on your credit card. Just what is a low-interest rate when it comes to credit cards? You should be able to obtain a rate under 10 percent, however, the going rate for many charge cards is a whopping 18 percent.

Most credit scores fall between 600 and 750.

The Core of the Score

Don’t be alarmed by all the numbers, most credit scores fall between 600 and 750. But, if you have a less than favorable credit score, the odds can stack against you and can be damaging to your future. How? In terms of employment, poor credit can lull an employment offer.

While a company interviewing you is strictly prohibited from accessing your credit score, they are allowed to request (with your permission, of course) a modified version of your credit report to determine whether you have a history of meeting your financial obligations.

Surprise! Surprise! Your credit score also can affect the rate you pay for car insurance. It is believed that those with low credit scores statistically are more inclined to make accident claims. Right or wrong, know that insurance companies take your credit score into account when they set your premiums.

Also, potential landlords may access your credit report before you even are allowed to sign your name on a lease. Renters must be able to meet their financial requirements in order to secure housing, otherwise, the landlord potentially can be out of a ton cash.

Knowledge is Power  

It’s worth knowing that the information that impacts a credit score varies depending on the score being used. Credit scores are affected by elements in your credit report, such as:

• Type, number and age of accounts;

• Number and severity of late payments;

• Total debt;

• Public records.

According to Experian, there is a host of factors that are not included in credit scores:

• Where you live;

• Your race, color, religion, national origin, sex or marital status;

• Your salary, occupation, title, employer, date employed or employment history (lenders may consider this information in making their approval decisions);

• Your age;

• Certain types of inquiries (requests for your credit report). The score does not count “consumer disclosure inquiry” requests you have made for your credit report in order to check it. It also does not count “promotional inquiry” requests made by lenders in order to make a “preapproved” credit offer or “account review inquiry” requests made by lenders to review your account with them. Inquiries for employment purposes are not counted, either.

Three Companies, Three Very Different Scores

From purchasing a car to buying a home, knowing your credit score is the key to making better financial decisions. Don’t know your score? You can obtain it through the three major financial reporting companies, Equifax, Experian and Trans Union. What’s more, you are entitled to a free credit report from a nationwide credit reporting company once every 12 months.

In some instances, residents of New Jersey, Maine, Maryland, Massachusetts, Colorado and Vermont may be able to obtain an additional free credit report each year; while Georgia residents may be able to obtain two free credit reports, yearly. With so many resources, there’s no reason to not know your numbers.

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-Kimberly Williams

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