Your credit score can determine whether you are approved for an auto loan, a mortgage, a credit card or a cell phone plan. If you do qualify for a loan, your score determines the interest rate. It also factors in to whether you qualify for an apartment and if you can get utilities without putting down a deposit. The higher your credit score, the better it is for you.
What Is a Credit Score
Your credit score is a tool lenders use to determine whether you are a good risk. Your actual score is a three-digit number calculated by a mathematical formula, based on your credit history. The scoring system that most creditors view is the Fair Isaac Corporation (FICO) score. According to the MyFICO website, 90 percent of the largest banks use your FICO score to make decisions.
Numbers
FICO scores range from 300 to 850. What lenders consider a good or a bad score, fluctuates with the economy. As of 2009, a FICO score of 760 to 850 puts you in the "excellent" category. Scores between 725 and 759 are "very good," according to Bankrate.com. To qualify for a premium credit card, for example, you would need to be in the very good category or above. If your score falls below 620, you might have a difficult time getting credit, says Steve Ely of Equifax, one of the three major credit bureaus.
Know Your Score
You have several ways to determine your credit score. You can obtain a free copy of your credit report once every 12 months through AnnualCreditReport.com, and pay an extra fee for your credit score. Alternatively, you can buy your FICO credit score at the MyFICO website or use a FICO score estimator at Bankrate.com (see the Resources section).
Breakdown
Your credit history receives one FICO score from each of the three credit bureaus, which are TransUnion, Experian and Equifax. The data is based on five categories, each weighted differently. Payment history, which includes your account payment information and any delinquencies, is responsible for 35 percent of your score. The amount you owe is 30 percent of your score. This also includes how much available credit you have. If you are maxed out, your score is lower. Other categories are length of credit history (15 percent), types of credit used (10 percent) and new credit (10 percent), meaning how much credit you apply for and recently opened accounts.
Significance
Bankrate.com demonstrates the importance that 200 points on your credit score can make. Suppose you have a $100,000, 30-year mortgage. A person with a score of 520 will pay 4.36 percentage points more than someone with a score of 720. The difference is $110,325 in extra interest over the course of the loan, which comes to about $307 more per month.
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