,
your payment history and credit history. Scorers take this
information from your credit report and plug it into
formulas that calculate a value representing the amount of
risk you pose to a lender. That value takes into account the
track record of other consumers with similar credit
profiles. By looking at this value, or score, lenders are
able to roughly gauge whether it's a good idea to extend you
credit. Fair Isaac calculates the widely used FICO credit
score on a scale ranging from 300 to 850 the higher, the
better. It is used nationwide by lenders to judge credit
worthiness. The score calculate generally used information
from one of the three main credit bureaus: TransUnion,
Experian and Equifax. It's possible there are discrepancies
among information held at each of the bureaus that could
affect your score and the interest rate you receive.
What else affects my chances for
qualifying for a loan?
A credit score is just one component of the credit
evaluation. This is especially so in the case of mortgages
and car loans. In examining these types of applications, a
lender will look beyond your raw credit score to scrutinize
your payment history, among other things. For instance, the
fact that the late payments on your credit report were on a
small credit card (as opposed to a mortgage) could work in
your favor. Lenders also take into account such factors as
your income and earning potential, both indicators of your
ability to repay a loan. Two borrowers with above-average
FICO scores of 660 can get different interest rates, based
on their existing debt burden and ability to meet required
payments based on their income.
Is the score treated the same for all
kinds of loans?
Generally, no. A mortgage loan, by virtue of its size and
long repayment terms, will usually require you to have a
higher score to qualify for a favorable rate than, for
example, a credit card. But the nature of the loan may also
play a role. For instance, a borrower with a low credit
score applying for a 15 year mortgage with a 25% down
payment may qualify for a better rate than someone applying
for a one year adjustable rate mortgage. Mortgage lenders
will typically look at all the risks involved before
deciding on a rate. A lender whose loan portfolio has a high
concentration of risky clients may require you to have a
higher score to qualify for a prime interest rate than a
lender with relatively lower risk in its portfolio. So it's
possible that given a particular score, you might get a
prime rate with one lender, and get a less favorable rate
with another.
What can I do to improve my score?
It's a good idea to make sure that the data each bureau has
on you are consistent and up to date by ordering a copy of
your credit report about once a year and disputing any
inaccuracies. You also should be aware of what affects your
score to help minimize the damage you can potentially do to
it. People tend to get nervous when they receive credit card
solicitations in the mail. However, scorers treat these
solicitations as "spot" inquiries, which do not affect your
score. Whenever you apply for credit, on the other hand,
it's treated as a "hard inquiry" that's factored into your
score. Too many inquires over too short a time can have a
negative impact. But scorers make special provisions for
mortgage and car loans inquiries because people tend to shop
around more for these products. Overall though, credit
inquiries account for only about 10% of the total score.
Also, keep in mind that the main components of the score are
your payment history and the amounts you owe. A bankruptcy
filing can remain on your credit report for as long as 10
years and foreclosures can "significantly lower" your score.
You should avoid taking on more credit than you can handle.
Late payments will also work against you, so it is important
to make all loan payments on time even if it means paying
the minimum balance. Ideally, you should avoid "maxing out"
your credit lines and strive instead to maintain low
balances. This will improve your score over time, because
people owing smaller amounts on their credit accounts are
viewed as having a lower repayment risk than those who owe
more. By carefully managing your credit, it's possible to
add as much as 50 points in a year to your score. There is
nothing that you can do to your credit from which you can't
recover.
How much should I worry about my
score?
Not all that much, unless you have an especially troubled
financial history. Much of the current anxiety over credit
scores stems from the public's misunderstanding of the way
in which these numbers are used and factors that affect
them. People spending a lot of time and money trying to
modify their scores when it wasn't necessary for them to get
preferential interest rates.
