A How-To Guide On Interpreting Credit Report Scores
A How-To Guide On Interpreting Credit Report Scores
Your credit score is an important part of your credit report. Your score is a number between 300 and 850 that rates the risk of your defaulting on a loan. The higher the score, the less likely you will default. The lower the score, the more risk you pose to the lender.
Lenders are looking for borrowers with high credit scores. With a high score, you are able to obtain lower interest rates, lower insurance premiums and better borrowing terms. If you have a low score, you may have a harder time finding financing, be subject to higher interest rates and have to put a large amount of money down as security for a loan.
What are credit scores?
Before interpreting credit report scores you need to know what they are. Credit scores are calculated based on the information from your credit report. You will see that credit scores are often referred to as FICO scores. This is in reference to the company that created the first score calculation software - Fair Isaac Corporation.
Each credit reporting agency uses a different method of calculating your score. However, you will find that your scores are fairly similar between the three major credit reporting agencies.
Approximately 35% of your score comes from your payment history. Do you make your payments on time, every time?
Thirty-percent of your score is based on the amounts you owe. Do you have a high ratio of debt to available credit? This could be negatively impacting your score. You want to show that you have at least 70% of your available credit unused.
The remaining 35% of your score is determined by the length of your credit history, the types of credit you use and the new credit you have.
Basic credit score categories
Each lender has different criteria as to what scores correspond with what interest rates, borrowing terms and information requested.
The basic categories are:
Excellent: This is a score of 730 or higher. If you have an excellent credit score, you will be able to easily secure a loan. Borrowers with excellent scores receive the best interest rates and repayment terms.
Good: This category includes scores between 700 and 729. With a good credit score, you receive favorable terms, market interest rates and have an easy time applying for mortgages, loans and credit cards.
Fair: This is a score between 670 and 699. With fair credit, you may have a little difficulty finding a loan or obtaining credit. You will have to answer more questions and put more money down on a home. Fair scores usually result in slightly higher interest rates and less favorable repayment terms.
Poor: When your score drops below 589, you are a high risk borrower. Lenders will ask for high interest rates, more collateral and higher down payments. You will often have a difficult time securing a mortgage, loan or credit card. You can find credit out there, but you will pay more for it.
Nonexistent: If your score falls below 585, you either have really bad credit or have no credit history at all. You should be wary of anyone offering you an easy loan at good rates; it may be a fraudulent situation. Take steps to establish good credit.
Let's look at the comparisons between a good credit score and a poor credit score. Borrower A has a credit score of 700. He is looking to buy a home. He is offered a five-year term of 6.75% on a hybrid, adjustable-rate mortgage. Borrower B has a credit score of 540. The best interest rate he can find on a five-year hybrid, adjustable rate mortgage is 8.25%. That is a difference of over ,000 a year in interest payments.
The basic way to think of credit scores is the lower your score, the more you will pay. By knowing what is in your online credit report and scores, you can take steps to improve it.