Do you realize the significance that your credit report score has on your ability to get credit approval or secure favorable loan terms? Its importance cannot be overstated. While it’s true that your credit rating will have no affect on your ability to buy dinner or a concert ticket, it most assuredly does have an affect on the big ticket items. The big ticket items that I speak of include auto financing, mortgages, business lines of credit, and even credit card applications.
What Is A Credit Score
Your credit score is a three digit number that is basically a numerical summarization of the information contained in your credit report. It is derived from the mathematical formulas that the three credit bureaus (Experian, Transunion, and Equifax) use. Each bureau collects their own information and has its own proprietary formula for scoring your credit. It is for this reason that you will often times see variations in scores amongst the three bureaus. They do not share information with each other.
Your credit score is an assessment of your credit risk. Accordingly, credit scores are rankings that fall somewhere in the range of 350 – 850. The higher the score, the better your chances are of getting credit approval with the most favorable rates. Generally speaking, a score of 720 and above is widely considered to be very good credit.
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What Your Credit Score Means To You
So, how do the numbers break down, and what do they tell respective creditors about you? Most people fall in the 600-750 range. Any score above 650 is considered to be fair to good as far as credit risk goes. But be aware that just because your score is above 650, it does not automatically mean you will qualify for the best rates available. These decisions are made by the lending institutions that you are applying to, and are determined on a case by case basis, so there really are no hard and fast rules set forth.
If your score falls below 650, don’t panic. You may still yet qualify for credit with desirable rates. In these cases you may be asked to provide the respective creditor with more documentation. Remember, the lending institution’s primary concern is your ability to repay the loan, with interest, on time. That is why your payment history plays such a large role in determining your credit score.
Scores below 620 are considered ’subprime’. To creditors, subprime borrowers represent a much greater risk of paying late, or defaulting (not paying at all) on loans. Because of this, the borrowers choices are greatly limited. Even if they are approved for credit, the size of the loan will be limited, and higher interest rates will be charged. We have recently heard quite a bit about the dangers of making subprime mortgage loans with the collapse of the housing market.
The Cost Of Your Credit Score
So, with all this talk of credit scores, how does it really affect you where it counts the most, in the pocketbook. Depending on the size of the loan, interest rate differences of just a point or two can translate into a substantial amount of money over the life of a loan. In the case of many people’s biggest investment, their home, the difference of one or two interest rate points can mean tens of thousands of dollars over the life of the loan.
And the large discrepancies are not just seen in the mortgage market. For auto loans it can mean thousands of dollars. Now if that isn’t substantial, I don’t know what is. It really is in your best interest to do everything you can to strengthen your credit score. While it may not be the most exciting thing in the world, taking the necessary steps to improve your credit score is well worth the time and effort.
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