Credit Score

What’s a credit score?
A score or opinion in a credit report that tells lenders whether a person is a safe bet as a borrower. The better the credit rating, the safer the borrower. The worse the credit rating, the riskier the borrower.

The official term for a person’s safety as a borrower is creditworthiness, but that’s mostly how bankers talk. Judgment of a corporation’s or country’s creditworthiness is usually called a credit rating. People have credit scores; companies and nations have credit ratings.

If you were considering a buddy’s credit score to decide whether to spot him a $20, you’d think, “What are the chances he’ll ever pay me back?” If you think they’re good, you’re giving him a high credit score. If you think they’re bad, you’re giving him a low credit score.

Little surprise, banks and other providers of credit want something more substantial than that. Official credit scores are usually supplied by a credit bureau such as Equifax, Experian, or TransUnion. Most consumer credit scores are on the FICO scale, which is named after the Fair Isaac Corporation that created it. The scale runs from 300 to 850. As a result of the 2003 Fair and Accurate Credit Transactions Act (FACT Act), every legal US resident may receive one free copy of his or her credit report once per year from any one of the three main bureaus.

It’s good to have a high credit score because it’ll help you get a loan when you need one, and sometimes a lower interest rate for being a safe bet.

Jason’s discussion
So, then, what’s a good score? The median fluctuates around 700 these days. If your score is 700, you’re smack dab in the middle of the millions. There are 80 million people riskier than you and 80 million safer than you. FICO has found that between 5 and 15 percent of people with scores around 700 default on their loans. The 750-799 bracket sports a default rate of only 2 percent, and the 800+ bracket just 1 percent. You probably have a better chance at that golden 800+ bracket than you think. A full 13 percent of Americans with a credit score are in it. Here’s a nodding acquaintance with the scale:

800-850  Anybody will lend you anything, and at a good rate
750-799   Darned good, but you won’t get the best rates
700-749   A little better than average
650-699   A little worse than average, so expect higher rates
600-649   Getting iffy — you’d better talk a good game
550-600   The red zone, filled with rip-off rates
300-549   You’re borrowing in ways that put your kneecaps at risk

According to Fair Isaac Corporation, “A 100-point difference in your FICO score could mean over $40,000 extra in interest payments over the life of a 30-year mortgage on a $300,000 home loan.” Your score will also affect how much you pay for insurance premiums, and can even determine your eligibility for certain jobs. It’s important.

How is your credit score calculated? By looking at five factors, with varying degrees of importance. They are:

35% Your payment history up to now
30% How much you owe in total right now
15% The length of your credit history
10% The number of new accounts you’ve opened
10% The type of debt you’ve used

Stellar candidate, FICO score 850: Hasn’t missed a single payment on previous debts, carries a reasonable amount of debt, has a long and complete credit history with nothing questionable in sight, maintains few debt accounts and keeps all of them current, and borrows mostly for wise moves like buying a home or starting a business.

Awful candidate, FICO score 300: Hasn’t made a single payment on previous debts, is in debt up to the eyeballs, has a spotty credit history that doesn’t go back very far and is filled with odd gaps and notations with phrases like “could not be reached,” opens a new debt account every morning, and borrows mostly consumer credit for things like rare leather jackets and diamond-studded nose rings.

About that new accounts portion of your score: Whenever you apply for credit or a loan, the bureaus know about it. If they see too many “inquiries” they’ll worry that you’re going crazy with debt or are in a heap of financial trouble. This is why you should limit your applications to just the debt you really need.

The FICO score couldn’t care less about your race, religion, gender, marital status, age, where you live, your favorite flavor of ice cream, or even your income. Yes, the last one’s true: your income doesn’t affect your FICO score. However, lenders care about your income, of course. Common sense says a person making a lot of money is a safer borrower than one making a little money.

That’s what leads to the old joke that the only way you can qualify for a loan is by proving to the bank that you don’t need it. Ha!

How to use credit score at a cocktail party

“Susan, I heard you’re buying a new house,” you say.

“Yes, finally, and I’m so happy. I paid off my credit cards over the past few years and grew my business, so my credit score improved and I was able to jump on these amazingly low mortgage rates.”

“What’s your credit score?”

“Excuse me? A lady never says.”

“Come on.”

“OK.” She leans in. “820.”

“Oh my goodness! That’s great.”

“I know. Yea, me!”

You signal the caterer. “Another mojito for the new homeowner.”

How credit score shows up in the news

You’ve probably heard about the importance of a good credit score — it opens access to affordable mortgages, auto loans and reasonably priced credit, but it could also help to secure a job, buy a cell phone or establish utilities without paying a hefty deposit. And a low credit score will cost you. People with a weak credit [score] will pay approximately $250,000 more in interest throughout their working lives than those with stronger scores. For entrepreneurs, that quarter of a million dollars could go a long way towards building assets, starting or growing a company, and creating jobs. Going from a weak to a good score can be one of the biggest hurdles that entrepreneurs are facing in today’s economy.

- Huffington Post

Be aware that canceling a credit card may actually hurt your credit score. Part of your score is based on how much of your available credit you actually use; this is your credit utilization ratio. When you close a card, this ratio jumps because you’re using more of your valuable credit. And when this ratio jumps, your credit score goes down. (Also note that the longer you’ve had an account, the more you’ll affect your credit score by closing it.)

- Time

There’s a certain mystery about applying for a credit card: Is your credit score good enough for the best card and rate? Just how much credit might you get if you are approved? What does everyone else get?

Now there are answers to these questions. With a new tool from, you can use information from a long list of credit card companies to find the best card for you, and figure out the one that you’re most likely to get approved for.

If you do sign up for CreditKarma and see your credit score (you can check back as often as once a day to see any changes), the site will also use that information to help you understand why the score is what it is. And, if your credit needs improvement, you can learn what will help and play out a variety of scenarios including what would happen if you had late payments reported, you got additional credit or you paid off all your debt.

- Reuters

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