Credit Score
The most important thing you should understand about your credit score is that it is not at all static. You don't get assigned one credit score forever. Your credit score doesn't even actually exist until a creditor requests your credit score. When a creditor requests your credit score, it is calculated instantly, based on the information in your credit file at that specific point in time. Fair Isaac is the firm that created the software used by the biggest credit reporting agencies. Fair Isaac specifically states that credit scores will fluctuate up and down on the basis of daily activities that will add more data to your credit report. The range of possible credit scores typically runs from 500 to 850; an average credit score is between 700 and 750. Although different lenders have different cutoffs for how they categorize potential customers, anyone with a credit score above 750 would generally be considered financially attractive - a prime borrower. Anyone with a credit score below 700 probably would not. About 40% of borrowers fall into this lower category. The difference between having a credit score of 550 and a credit score of 720 doesn't necessarily mean you won't be given credit - but it almost always means you'll be hit with higher interest rates. According to Fair Isaac, a consumer with a low credit score could almost $131,000 more than one with a higher credit score over the life of a 30 year fixed mortgage for $150,000. That's a big deal, especially considering that according to a major mortgage lender, anywhere from 10% - 15% of consumers are incorrectly offered rates that are lower than prime. Fair Isaac claims that the calculation of your credit score only uses information that is found in your credit reports - a very good reason to check out what the reports say. For anyone without special consideration (like being too young to have a long credit history), the information considered, in order of priority, includes your payment history, how much you owe, the length of time you've had any kind of credit, types of credit you have, and how much of our credit is new. Your profile is compared to thousands of profiles of other people. Based on what happened with those folks - whether or not they paid their bills - you are assigned a number that indicates how much of a nonpayment risk you represent. The good news is that lenders typically look at credit scores from all three CRAs when evaluating you as a potential customer. The bad news is that still doesn't always mean a perfectly happy ending. A 27 year-old buying his first townhouse in Southern California found that the three big CRAs had assigned widely varying credit scores to him. Unbeknownst to him, the lender used the middle number to determine the young man's mortgage rates. Unfortunately, his credit score put the man into the high-risk category, costing him an extra $3,450 for the first two years of his mortgage. Had he been aware of what was happening up front, he might have been able to request a review of his files and a rescoring of them to negotiate a better deal. The moral of this story is that it's worth talking with any potential lender about your credit scores and how they are used. |
