Monday, October 19, 2009

Understanding Credit Scores

By: Jessie Bruyn

In order to determine whether you are approved for a credit card, creditors use a scoring system to essentially rank your reliability in paying back the borrowed money. The score is calculated by a mathematical formula - each one is different depending on which credit scorer they company uses.

Fair Isaac, or FICO, is the most popular algorithm used. The distribution of American's credit scores published by Fair Isaac is as follows:

Credit score

The importance of a good credit score is especially important in determining loan interest rates. According the the FICO website, difference in the interest rates offered to a person with a score of 520 and a person with a 720 score is 4.36 percentage points, which can make a huge difference in the amount of repayment in the long run.

You are entitled to one free credit report a year and if you are ever turned down for a card for reasons related to your credit score you are also entitled to see the credit score and report in question. Credit reports can be obtained from one of the four national credit reporting agencies: Experian, Equifax, TransUnion, and Innovis.

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