Credit scores compile information from a consumer's credit history into a numerical representation of a borrower's creditworthiness. Many different credit scoring models exist, but lenders rely on the Fair Isaac Corporation, or FICO, score more than any other. The FICO score represents the likelihood a borrower will default on a loan or credit obligation in the future. Both Experian and TransUnion compile credit information from consumers and calculate a FICO score based on that information.
History
Credit reporting began over a century ago, according to Malgorzata Wozniacka and Snigdha Sen of PBS. The modern framework of credit reporting came into being with the passage of the Fair Credit Reporting Act, or FCRA, in 1971. FICO, established in 1956, became a major player in credit score reporting when Fannie Mae and Freddie Mac recommended lenders use FICO scores to determine credit worthiness. To enhance transparency, President George W. Bush signed a revision to the FCRA requiring Experian and TransUnion to make FICO scores available to consumers in 2003.
Benefits
Consumers see numerous benefits to having a great credit scores. High credit scores generally translate to better interest rates on all monies borrowed, including mortgages, car loans, credit cards and personal loans. Additionally, great credit scores allow for easier approval of many types of credit, including mortgages and car loans. Credit scores may dictate the amount of documentation needed for loans; some mortgage companies require less documentation if consumers possess great credit scores.
Components
According to the Fair Isaac Corporation, five categories, varying in importance, affect a FICO credit score. Those categories and their respective importance include payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and types of credit used (10%).
Range
Fair Isaac Corporation credit scores range from 300 to 850, with most consumers falling between 600 and 750. According to Experian, a score above 700 suggests good credit management. Check-Credit-Score.org reports a score above 749 is excellent, while a score between 660 and 749 is good. The Credit Truth organization states an excellent score is 750 to 850, while a score from 700 to 749 is very good.
Misconceptions
Some consumers mistakenly believe a great credit score determines whether they get a mortgage or loan. In fact, a great credit score is only one factor among many, including income level, employment status, residential history and down payment, to name a few. Contrary to popular belief, income level and employment status do not affect a credit score. Finally, some believe they can get their credit score free once a year. In reality, TransUnion and Experian only make annual credit reports free; the companies provide credit scores for a fee.
0 comments:
Post a Comment