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Credit score numbers or FICO (Fair Isaac Corporation) scores can be confusing because
few people actually know what the ratings mean. When you're told you have a good
rating, what does it mean and is that the best? Where do the numbers come from? These
are important questions that can help improve your financial well being, and best
of all, can save you money.
The rating you are given is calculated based on the information in your credit report.
Important factors include the ratio of the credit you are using to the credit available
to you, so if you pay down your card balances it will have a positive affect on your
report, and thus, your score.
Other factors include the age of your accounts, unpaid debt and late payments. Having
a varied history using different types of accounts (for instance, both cards and
loans) and on time payments will help build up a healthy credit score.
Companies that ask to check your financial history will send away for your information
and be sent your credit score numbers. Many different companies – rental applications,
employment applications, lenders, and insurance companies – will ask for your credit
Each lender then decides what your credit score means to them. They will use it to
help them decide whether to accept your application, and then what interest rate
to offer you. This means that with a lower rating, you'll be offered lower interest
rates, and thus you save money.
Generally speaking, FICO scores run from the 300 point range all the way up to 850
points. While there are not official terms used to reference ranges of numbers, you
will typically hear people refer to scores as bad, acceptable, good, and excellent.
People with bad ratings (below 584) will have a hard time getting accepted for many
things as they may be considered a greater credit risk but it does not mean that
they can't get credit. The loan application process will probably be lengthier and
the terms may be less appealing – highest interest rates.
Acceptable scores will generally find they are accepted for things, but will still
have high rates. Good scores will generally always be accepted, even for big things
like mortgages, and may even be offered the best interest rates on some things, but
Excellent ratings (720 and above) can do anything, and will always be offered the
best rates. With an excellent rating, you will also get a lot more flexibility out
of companies. Lenders will often allow you to borrow more than 80% of the value of
your home, and may not require private mortgage insurance.
You're 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%, you should
be able to obtain a rate under 10%.
As you can see, your credit score numbers can have a large impact on your finances
and they're really worth improving on.