Value of a Good Credit Score

A credit score is a measure of risk used to assess an individual's credit worthiness. Credit scores are generated from statistical models that weigh several factors in a person's credit record like, bill-paying history, the number and type of accounts, late payments, collection actions, outstanding debt, and the age of accounts. A credit scoring system awards points for each factor. A total number of points make up a credit score. This scores helps predict how likely it is that an individual will repay a loan and make the payments on time.

The most common credit score used today is the FICO score.

The most common credit score used today is the FICO score. Each of the three credit bureaus calculates a FICO score and makes those scores available to lenders and creditors that want to understand the risk they are taking if they decide to lend money, extend credit, or even waive a deposit. In order for your FICO scores to be calculated, each of your three credit reports must contain at least one account which has been open for at least six months. Each report must also contain at least one account that has been updated in the past six months. This guarantees that there is sufficient data and enough recent information in your report on which to base a FICO score on each report.

Your credit score is calculated based on the information in your credit report.

Since some businesses choose to report to only one or two of the three bureaus, it is likely that each of your three credit reports contains slightly different data, which would result in different scores. Your credit score also changes as new data is added to your credit report. Your scores may vary by as much as 50 points, depending on which credit bureau you get them from.

Each credit bureau has its own method for collecting and assessing data, however each follows the same methods that Fair Isaac developed. The names used by each of the credit bureaus for their FICO credit scores are:

Credit Score and Interest Rates

Your credit score is the most important factor in determining what rate you will pay when you borrow money. Your credit score could cost or save you hundreds or thousands of dollars a year. The higher your FICO score, the better chance you have of getting a home mortgage loan. The higher your score the more room you have to negotiate a lower interest rate. It is difficult to get credit with a score of 500 or below, if you are extended credit be prepared to pay extremely high interest rates.

National Credit Scores

The table below shows the percentage of people that fall within the various ranges of FICO scores.

Credit Cards

To qualify for a credit card you usually need a credit score of 660. With a credit score of 740, you will qualify for a credit card with the lowest interest rates and the best deals on balance transfers, cash back cards and travel reward cards.

Home Loans

In today's economic climate, a FICO score of 620 is commonly the minimum credit score you must have to meet the criteria for a home loan. With a credit score of 760 or higher, you will likely qualify for the best rates and terms.

Auto Loans

To get the most favorable terms on an auto loan you would need to have a credit score of a 720 or higher.

Remember to always be financially responsible so your credit score can be as high as possible. Anytime new information is added to your credit report, your credit score can change. A change in your credit score that leaves you with bad credit can considerably affect the interest rates you pay on loans. Learn how to easily spot negative items on your credit report, dispute those items and boost your credit score with the Complete System to Repair Your Credit and Boost Your Credit Score. Get Started Now!