Understanding credit scores
Your credit score is expressed on a scale between 300 and 850. This numeric credit rating system originated with the Fair Isaac Corporation, and is also known as your FICO score. To come up with your score, several factors are considered together to measure your responsible use and repayment of borrowed money over time. The average credit score is in the range of about 700. To any potential creditor, a high credit score means you are likely to pay back borrowed money according to the terms you agreed to when you entered the loan agreement. Lenders view a low credit score (sub-prime) as evidence that you are late or not paying your bills. They see a high score as evidence of personal responsibility.
Credit bureau perspectives
Individual creditors report details of your account activities to three major credit reporting agencies: Equifax, Experian, and TransUnion. These organizations analyze your credit risk level according to the following scoring criteria:
- Bill paying habits: Do you pay rent, credit card bills, loan payments, and car payments on time?
- Collections: Has a company been hired to collect an unpaid sum on behalf of one of your creditors?
- Debt level: Is your total debt reasonable or do your balances indicate that you are approaching your maximum approved credit limit?
- Credit history: Do you have 10 months or 10 years of responsible borrowing experience? The longer your experience, the better.
- Recent activity: Have you personally applied for four or five credit cards over a short period of time? If so, credit-reporting agencies may assume you are in financial trouble.
- Court judgments or bankruptcies: These will reduce your credit score.
The credit bureaus look at a few other things as well. You may be evaluated according to the type of job you hold, your occupation, the length of your current employment, and whether or not you own a home.
Sub-prime credit scores
Anything below a score of 620 to 650 can place you in the sub-prime borrowing category. “Sub-prime” is a general term in the lending industry used to identify borrowers who have had trouble making loan payments on time, filed for bankruptcy, or experienced other money problems. The credit performance of these borrowers is not as strong as the typical lender hopes for, so they are subject to sub-prime interest rates. "Sub-prime interest rates" are higher than those offered to higher-scoring borrowers. For example, mortgage loans based on a sub-prime score may be granted, but with an interest rate 1-2% higher than the best rates available, and with additional loan fees tacked on. This doesn’t sound like much, but when it comes to a home mortgage, it can easily make the difference between being able to buy a starter home or not.
For more information about credit scores visit www.Fico.org.