What does your credit score mean?
We strive to achieve many things in our adults lives — a high paying job that we also love, a nice home, financial security for ourselves and our families, and of course a high credit score.
I place a good credit score on the same level of importance as those other things because that is actually the key to helping you achieve some of those other goals. But, I wonder how many people are actually working toward a higher credit score.
Credit scores — sometimes referred to as FICO scores because of Fair Isaac Corporation which created the scoring system — range between 300 and 850. Different lenders may gauge what is a “good” credit score different. In general, however, credit scores above 720 are considered good while scores in the 760 and higher range are considered very good. The higher your credit score, the better chance you have of not only getting a loan, but getting a good interest rate. Lenders use your credit score to determine your creditworthiness.
Your credit score is calculated based on the information contained in your credit report. Some things that factor in to your credit score are:
- Payment history. Do you have any late payments or delinquent accounts?
- How much you owe. How many credit accounts do you have, and what are the balances on those accounts?
- Length of credit history. Your credit score will increase with a good, established credit history.
- New credit. Simply put, are you taking out new debt? This could be unfavorable to a lender, depending on each person’s unique situation and credit history.
- Types of credit. Do you have a lot of revolving debt, like credit cards, or installment loans, like a car loan? In general, lenders prefer to see a healthy mix of the various types of debt.
If you think your credit score isn’t that important, consider this example (provided by myfico.com and published in the Akron Beacon Journal):
A credit score of 680 might qualify you to borrow $200,000 over 30 years at an annual rate of 6.029 percent. At that interest rate, your monthly mortgage payment would be $1,203.
Now say your credit score had been in the 760 to 850 group, your interest rate would have been 5.521 percent, and your monthly mortgage payment would have been $1,138.
Maybe $65 doesn’t sound like much of a savings to you. But, multiply that $65 over the 30-year life of the loan and that adds up to an additional $23,400 you just paid for your home because of your credit score.
Check out www.myfico.com for even more information about credit scores.
Remember you are entitled to a free copy of your credit report from each of the credit reporting bureaus (Experian, Equifax and TransUnion) each year, but you do have to pay for your credit score. You can get your free credit report and purchase your credit score at www.annualcreditreport.com.