Every time you promptly pay a bill or retire an old debt, you improve your “FICO” score. Every time you fall outside your grace period or miss a payment, you harm your score. Almost every financial transaction has consequences for your credit history, and financial institutions use that history to determine whether or not you have proven yourself worthy of credit. The different agencies compute your credit scores using slightly different formulae. Some lenders use Trans-Union and Equifax services, but the majority prefer the formula Fair Isaac Corporation applies to your financial history—your FICO.
Your FICO score determines your interest rates on major secured loans—your house and your car; it also determines your rates on unsecured credit—retailers’ revolving charges and all your bank cards. Your FICO score also determines how much you will pay for auto insurance, because insurance companies now calculate their exposure not only according to your driving habits but also according to your payment habits.
Your FICO score theoretically may range from 300 to 850. In the real world, FICO scores range from 550 to 770. If you number among the elite, you may score an 800; but if you have an 800-point FICO score, you probably are lending money rather than borrowing it. Among American families, FICO scores average between 690 and 720, right on the margin between adequate and excellent. Credit scores above 720, and especially scores above 750 qualify for banks’ and credit cards’ preferred rates. A score in the low 600’s translates “good luck with that.” Not surprisingly, the New Depression has dragged down Americans’ average credit scores, forcing lenders to adjust their standards according to new market conditions. Many lenders, however, have raised their qualifying standards, reducing their risk of accumulating “toxic assets.”
Financial experts strongly recommend you check your credit report at least once each year, and a handful of websites provide free access to your FICO. The majority of credit reporting services require you to subscribe either online, the preferred method, or by mail. Typically, when you become a subscriber, you receive monthly updates of all three credit reports. A few will alert you to any significant change at any time.
The meaning of your FICO scores.
Lenders look at the range into which your score falls, and differences of a point or two matter very little. A 721 credit score distinguishes you as an extremely low-risk borrower. Unless the world ends or you spontaneously combust, lenders safely may assume you will honor your obligation and repay your loan. Given your credit history, you probably have “apocalypse insurance” and will pay off your loan no matter what happens. A 722 credit score has the same implications, but 719 puts you on the bubble. You will get credit, but you will pay more for your bowing privileges.
- If you have scored 720 or more you enjoy the benefits of good credit citizenship. When you apply for a home loan, you ought to receive the lowest available interest rate, and when you accept bank cards, both fees and interest ought to encourage your liberal use of the cards. Keep in mind that your skilled, strategic use of credit protects your high score. You lose points for paying cash wherever you go. For example, a 721 credit score or a 722 credit score puts you in the category of a low risk borrower.
- If you have scored 675 to 719 your credit remains satisfactory, but you have fallen out of the big leagues. Most lenders will grant you credit, but they will make you pay more for the money you borrow, and especially they will impose much more costly penalties if you miss a payment or default on your obligations.
- If your FICO totals between 620 and 674 you will not qualify for some kinds of credit. Premier credit cards will decline your applications, and many cautious lenders will reduce your spending limits. Credit card issuers also may charge higher annual fees and make you pay larger penalties as a result of your poor payment history.
- If your FICO hovers below 620 you become a “sub-prime” borrower, facing severely limited credit options and enduring considerably higher interest rates. With a considerably below average FICO score, you also become a target for predatory lenders, the kind who assured mortgage borrowers, “Of course, you can afford that million-dollar house on your hundred- dollar salary”. A below average credit score warrants careful examination of your FICO report, suggesting some information may be outdated or incorrect; and your low score may warrant some work with a debt counselor or financial planner.
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