A credit score is officially known as FICO score. FICO stands for Fair Isaac Corporation, which is the company responsible for managing credit reports. In this era, more and more insurance companies and landlords take a person’s score into account. Reviewing the credit score is now a common part of renting an apartment and getting good rates on various insurance forms.
A score is never constant. It will be updated once there is a new piece of information available. Another important thing that you should know is that your score varies from one credit bureau to another. Therefore you do not just have one score but many. Approximately, 70% of credit scores get modified up to 20 points within 90 days.
Why Credit Score is Important
A credit score is similar to a student’s grades. It is a reflection of your behavior as a credit card owner. Your current score is presented to lenders in case you wish to apply for a loan. The lenders will utilize it to assess whether you can pay your bills. If they find you incapable of paying your bills, they will most likely deny your application. In some instances, lenders may also use your credit score to determine the credit limit they can give if they will approve your application.
Calculating the Score
The average credit score at present is between 600 and 700. The lowest score is 300 while the highest is 850. Computing the FICO score uses an algorithm that is not publicly available. However, there are general pieces of information that can be used to determine your own score:
Notice that your actual income is not considered, which is quite interesting. When people talk about good credit score, this means that it should be at least 760. Such score will give you excellent interest rates on loans and mortgage. Do note that the rates depend on the guidelines of your lender or creditor.
According to myFICO, there is specific impact on potential rates on mortgage. For instance, if you have a score of 760 to 850, your interest rate is 4.61% while your monthly payment is $1,109. On the other hand, if you have 700-759 score, interest rate is at 4.83% and monthly payments amount to $1,138.
Why Care about Credit Scores
There are four simple reasons why you should take notice of your score. If you currently have low score, make sure you find a way to improve it. This is because credit scores determine whether you should be approved for your credit card and loan applications. Your credit score will also be used to discern how much interest rate will be imposed on that particular loan. This also affects your car insurance rate. If you have been hoping to rent an apartment, your credit rating will also determine if you will get it or not.
To sum it up, poor credit scores mean the rates will be higher for you. Low scores primarily denote that you have made a financial misstep. It is high time that you change your spending habits to take advantage of high credit score benefits.
Have a high credit score? Here are credit cards for people with high credit: