Credit Reports and Scores: What is a credit score?

Have you ever wonder why you can go online and be approved for credit just within 60 seconds? Or get pre-qualified for a car and no one even ask you how much money you make? Or why you there is a difference between the interest rates of you and your neighbor?

The answer to these questions is credit scoring.

your-credit-score

Your credit score is a number that is generated by a mathematical algorithm, this is a formula which is  based on information in your credit report, compared to the information on tens of millions of other people. The number that you get as a result of this is a highly accurate prediction of how likely you are to pay your bills.

If it sounds mysterious and unimportant, you couldn’t be more wrong. There is an extensive use of credit scores, and if you’ve got a mortgage, a car loan, a credit card or auto insurance, then the rate you received was directly related to your credit score. As much higher the number is, the better you look to lenders. People who are having the highest scores get the lowest interest rates.


Scoring categories

The scale runs from 300 to 850. There is a huge majority of people that will have scores between 600 and 800. According to data from Fair Isaac Corp., a California-based company that developed the credit score (Its own score is called the FICO score.), If you have a score of 720 or higher then it will get you the most favorable interest rates on a mortgage.

Credit-score-chart_svg

What’s the big deal?

It has been said by Ed Ojdana, who is the president of Experian Consumer Direct, part of Experian, the largest of the three major credit-reporting agencies that your credit score will determine if you get credit at all, and it will also determine the interest rate on that credit. He says that the better will be the score, the lower will be the interest rate that you will get and that can save you a ton of money.

According to Fair Isaac’s Web site, the difference in the interest rates that is offered to a person with a score of 520 and a person with a 720 score is 3.45 percentage points. According to Bankrate.com’s mortgage calculator , on a $100,000, 30-year mortgage, due to that difference it would cost a person more than $85,000 extra in interest charges. In the monthly payment alone there would be a difference of about $235.

Powerful little number

If you have rented an apartment, or got braces, or may be you have bought cell phone service, or you might have applied for a job that involved handling a lot of money, or if you needed to get utilities connected, then there’s a good chance your score was pulled.

According to a credit scoring study by the Consumer Federation of America and the National Credit Reporting Association, if right now you have a credit card, then it is more likely that the issuer will look at your credit score in order to decide whether to increase your credit line or to charge you a higher interest rate.

It has been said by Bob Kurilko, vice president of marketing and industry communications for Edmunds.com, an online consumer resource for automotive issues, that do you want to buy a car? Most car dealers want to know your credit score when you would go to purchase a car. They want to know how they can put a loan together for you.

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