Credit Ratings / Scores

A higher score equals lower rates

The whole world of credit is essentially based upon people’s individual credit ratings or scores. In the U.S., this credit score is often referred to as a FICO score as it’s calculated by the Fair Isaac Corporation.

When you apply for any type of loan or credit card, the lenders want to know how risky it is to lend you the money. The credit rating that you are assigned indicates how much of a risk you are. There are three FICO scores that are used to determine your rating, one for each of the three major credit bureaus: Experian, TransUnion and Equifax.

Each score is based on information the credit bureaus gather and file on you. Your rating will fluctuate as your credit information changes. This could be the result of missed and/or late payments or taking out more loans. Your credit scores affect how much money you will be lent and what the interest rate and payback time will be. The better your score is, the better rates you will receive from lenders. Your credit score can literally mean the difference of thousands of dollars in saved interest fees, so it’s important to try to receive a good score.

Every month, financial institutions and creditors send files to the bureaus which include your account numbers, types of loans, outstanding balances and bill payment history. These files also include information supplied by the consumer, which may be gathered when you fill out credit card application forms, as well as public records such as bankruptcies, court judgments, overdue child support, and foreclosures and liens. By American law, these credit bureaus can keep any negative information on you for up to seven years.

Fair Isaac supplies credit bureaus with software containing a mathematical formula which is used to calculate the score. The scoring method awards points for each positive aspect about your credit history. The total number of points is used to predict how creditworthy you are. The credit score is a three digit number between 300 and 850. The best lending rates are awarded to people with scores above 770; however, a score of 700 is considered good, and the median score is about 725.

If you are worried about applying for a new credit card because it may negatively affect your score, you can contact your local financial institution to inquire about receiving a free copy of your own credit report.