A three-digit number that has a significant impact on your life, your credit score may determine whether you can afford to take that vacation, replace your car or redecorate your home. Understanding your score, how it is calculated, and how it is used can help you plan and make informed financial decisions.
Credit Scoring Systems
Credit scoring systems vary from one institution to another, although there are significant similarities in terms of the information that is factored into a score. Following a complex analysis of account conduct and borrowing profiles across a broad sample of customers, a credit scoring system allocates points for characteristics that are prevalent in good payers and deducts points for information that is indicative of poor payment performance. When you apply for credit, the scoring system draws on the information held on your credit file and scores you according to your payment history, the amount of your available credit, balances owed, length of credit history, new credit and the types of accounts held.
Credit Decisions
When making credit decisions, lenders will consider your credit score as well as other factors such as your employment history and income. These additional factors may be built into the lender's own scoring system or considered alongside the score derived from your credit file. According to Bankrate Inc., myFICO claims that 90 percent of lenders use the FICO credit score as part of the decision-making process. FICO scores range between 300, the highest risk to lenders, and 850. Although lenders are likely to apply different cut-off scores, the higher your score, the greater your chance of obtaining credit.
Pricing Decisions
A customer whose credit score is too low for one lender may be accepted by another, but at a price. Lenders price for risk. If they take on customers with lower scores, they pitch interest rates high to compensate for delinquencies. Individual lenders apply different rates across their portfolios, reserving their best rates for those with the highest scores. Bankrate Inc. suggests that only those with credit scores of above 740 qualify for the keenest mortgage rates. Credit card companies typically offer a range of cards, with charges and benefits applicable to different credit score bands; and a customer with a mediocre credit score can expect to pay $5,000 more interest on a $25,000 auto loan than one with a good credit score, according to Liz Pulliam Weston of MSN Money.
Considerations
Whether or not you are looking for new credit, it pays to maintain a good credit score. Make all your payments on time and avoid maxing out your credit cards, reducing balances whenever possible. Existing lenders periodically review your credit score and may seek to implement rate increases if your score has declined. If you are seeking new credit lines, use the myFICO score estimator to determine your approximate score; you can then search for lenders who provide credit to customers in your score band and compare available rates. The Bankrate website has facilities that allow you to search according to your credit score.
0 comments:
Post a Comment