Managing Your Credit Score
Part 2 of 8
What does your credit score mean?
This rating system is meant to develop a snapshot of the risk you currently represent to a lender. Several parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between about 300 and 950. There are other scores used by lenders and insurance companies (some of which are developed by FICO) such as Application and Behavior scores. These other scores take other information into account. Usually a lender will use a combination of your credit score with other factors when determining your risk. They all have the same objective, to determine the borrower’s potential risk. Regardless of whether the score was generated by FICO or a system based on FICO parameters, they all yield an industry standard three-digit score. This score places the borrower in one of three main categories (we named the third one ourselves).Keep in mind… of the three reporting agencies the middle score, of the three, is used for evaluation.
Prime, sub-prime, and shafted
Prime – If your credit score is above 680, you are considered a “prime borrower” and will have no problem getting a good interest rate on your home loan, car loan, or credit card.
Sub-prime – If your credit score is below 680, you are sub-prime, and will likely pay a much higher interest rate on your loan.
Shafted – Below 560 is the shafted score. At least that is how most lenders and credit issuers perceive it. You can still get a credit card but you will likely be hit with a security deposit or high acquisition fee. In addition to that your interest rate will likely be 28 to 29%. You can forget about most home loans and the majority of new car loans at this score. Below 560 is no place to be. You will pay much, much more in higher interest and unnecessary fees. You may even pay more for your insurance rates. A very low score can even prevent you from getting a job with many companies.
End of Part 2 of 8
Continued Next Week
Heather Garza said,
Wrote on February 7, 2007 @ 3:00 pm
Thank you for this info. I realize for some understanding credit scores and all that comes easy. Not for me, you couldn’t have explained it any better! Looking forward to Part 3.