Friday, December 4, 2009

Understanding Your Credit Score

Posted by: Janielle Viggiano

Credit scores or FICO scores are numbers that are assigned to you that represent your credit history. According to the Associated Press, “The information that is used in determining your FICO score comes from a variety of places including the major credit bureaus, credit card companies that have issued you a credit card, banks and other financial institutions where you have loans, and other data bases that have consumer data on them (2009).” The numbers are added up and determine whether you are eligible for low cost credit, higher risk credit, or no credit at all. The higher your score the better your credit rating, which translates into lower interest rates on loans or other credit items.

According to Lending Tree if you have a credit score of 720 or above, you have excellent credit and will most likely receive a lender’s most favorable rates. “Lenders will often allow you to borrow more than 80 percent of the value of your home, and may not require private mortgage insurance. You will likely be able to get a home equity loan or line of credit with an interest rate equal to the prime rate, or even below it. You can also look for a credit card that will reward you with a low interest rate -- while many cards charge 18 percent, you should be able to obtain a rate under 10 percent (2007).” 675 to 719, you’re not going to get the best rates but should still have no difficulty finding a good loan. “On a 30-year fixed-rate mortgage, expect to pay up to half a percentage point more than someone in the top category (2007).” 620 to 674, “With a below-average credit score, your options will be reduced, and you’ll pay a premium on your loan -- perhaps as much as 2 percent more than borrowers with excellent credit. You may need to provide more documentation than those with higher scores, including a formal appraisal of your home’s value (2007).” Lastly, below 620 puts you in a category of a “sub-prime” borrower. You’ll most likely pay at least 3 more percentage points than someone with excellent credit and will be in the double digits for a home equity loan. A poor credit score can hurt your rate for car insurance and even put a damper on a job search.

One can improve their credit scores by paying their balance on their credit cards on time, at the end of each billing cycle, and not just paying the minimum amounts. According to, “Existing lines of credit should not be canceled since doing so will increase the debt utilization ratio. The ratio between the outstanding balance and the amount of available credit is known as the debt utilization ratio. Again, increased credit limit will result in lowering the debt utilization ratio. A low debt utilization ratio is good for the credit score while a high ratio impacts the score negatively (2009).”



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