What Is A Credit Score

Category: Finance, Credit.

A credit score can be likened to an invisible stamp by which the whole world will judge you.

What is a credit score? Your ability to borrow money, secure housing and, get a job provide for your family is directly affected by your three- digit credit score. A credit score is a three digit number that is formulated using information from your credit report. If you have fallen behind on your bills and neglect to pay your creditors, your score will be quite low. If you pay your bills on time, honor your debts and handle your finances responsibly, you will have a higher credit score. The most common credit scoring system in use today is the FICO( Fair Isaacs Corporation) system which was created to standardize the scoring process.

They do not even have to meet you. With this standardized system in place, lenders can take one look at your score and make a decision about you. They do not have to know how much money you make, and they definitely do not have to know what personal circumstances caused you to fall behind on your bills. Even if your credit score is substantially below 720, you might still be able to secure financing at a price. Credit scores range from 300 to 85If your score is above 720, you will have no problems borrowing money and securing low interest rates. You see, lenders calculate their risk using your credit score and offset that risk with high interest rates. If your score is 500 to 600, there is an 8 to 1 chance that you will fall behind.

For example: If your credit score is 760 to 799, statistics show that there is a 597 to 1 chance that you will fall behind on your bills. This means that if a lender loans money to 8 people with credit scores ranging between 500 and 600, one of those people will not pay. Charge the other 7 people higher interest rates to recoup the money lost on the defaulted loan. So, what does the lender do? This system is backwards to say the least. Lenders may be keeping their heads above water, but what about families who are struggling to make ends meet? Well, at least for the consumer.

It is common sense that people who struggle financially will not be able to afford higher interest rates. As you can see, it is in your best interest to improve your credit score. Take a look: a$ 200, 000 home with a 30 year fixed mortgage at 8% costs the homeowner$ 96, 000 MORE in interest payments than if they had secured the same loan at 6% interest. Even a slight change in your score can impact your finances dramatically. Todays economy has made it very difficult for even the most credit worthy to secure financing. Even if you feel that you have good credit, you should still concentrate on getting your score up. The message from financial advisers is clear: If your credit score is not above 750, you could be in trouble as lenders continuously tighten requirements.