Credit Score- The Truth About It


  • Author Thomas Cumberland
  • Published September 16, 2011
  • Word count 1,056

Although only numbers, your credit score is a profile of your credit worthiness, and can make a big difference in what and how you purchase. This score is based mostly on credit history and reporting criteria obtained from credit bureaus.

Banks and other lenders use credit scores to calculate the possible risk presented by lending money to consumers, and to determine who qualifies for loans, what the interest rates will be, and how much credit is offered.

Many other institutions and organizations, such as insurance companies, landlords, mobile phone companies, government departments, and even employers. also use credit scoring for evaluating potential customers, tenants, or employees. They even use the same techniques as the credit reporting bureaus.

The most widely used and commonly known credit score model is the FICO, and they control most of the credit score model. There are some competitors, but they collectively share the rest of the smaller percentage.

FICO is a publicly traded company that has set the standard for credit scores, and this model is followed by the three largest credit repositories in America- TransUnion, Equifax, and Experian.

In the US, FICO scores range from 300-850. Basically, the higher the score, the less the risk lenders believe you will be to go 90 days past due on any payment or worse, on any loan within 2 years from the date the score was determined.

There are different algorithms used to determine a credit score, so that is why there are discrepancies between the different lenders and their scores. This also makes it a little more difficult to determine what exactly the lenders are looking for to obtain and keep a high credit score.

The two main categories rates fall under are "prime" and "sub-prime", and the general consensus requires a score above 620 to qualify for prime rates. Due to recent economic upheavals caused by shady lending tactics, the whole scene has changed and lenders may require a higher score for certain scenarios, especially when borrowing for the purchase of a home.

In the US, people are allowed one free credit report within a 12-month period. If you want to obtain a free credit score, you have to go to a different agency. These type of companies offer a free credit score, but you do have to subscribe for credit protection with an email and credit card. The trick is that you have to cancel the free subscription for their services before they charge you.

The three credit bureaus that report your score run the free credit report, so you will get all 3 companies in your free report. To obtain a free credit score from them, it can be around $10 or so, as they are regulated by the FTC and cannot charge an exorbitant fee.

There are a few myths that should be cleared up, as well.

A friend of mine once asked me to accompany him on a car purchase, as he had no other willing volunteers. I had time and felt it could be a good learning experience, as these occasions always are.

The negotiations had pretty much been worked out already, just a few details to work out, sign the contract and off we go. Easy.

And it was. The sales agent was younger than both of us by at least 11 or 12 years, and he was sharp. We got into talking about credit, of course, and he gave us some tips that were simple, but revealing.

Now I am sure most of you already know these to some degree, but here it is from a pro.

Myth #1- The more you have tied up in credit, the higher your credit score.

This is only half true. It really depends on how often you use the credit you have, and how you manage on paying back in a timely, smart manner. The car salesman told us the more you use it, the higher your score will be, as the creditor's confidence in you gets higher and higher.

Myth #2- The credit card companies like it when pay off your balance in full.

This is not really a concern as much as when you pay them back on time over a long period, never missing a single payment. Showing responsibility in all aspects will raise your score with certainty.

Our car salesman said that the best thing to do is this- pay off one credit card to a zero balance, and use it monthly for gas and small purchases. Pay it off or down to very low every month, and do it over and over again.

If you have a car loan, mortgage, or both, then you are golden. He also told us that when you pay off the car, your credit score drops until you take up another loan. And even then, it can take a while for your score to creep back up again.

Myth #3- Obtaining new credit lowers your score.

It is not necessarily what new credit you obtain, unless of course you go out and do something radical, like go and get three new lines of credit on three cards.

Our new credit guru told us that new credit does not hinder your score if it is used with the same conservative, responsible use with which you have used your other lines of credit.

At this point he reminded us of how important it is to get your credit checked, and was kind enough to tell us a personal story.

He was a young kid, remember, yet he had purchased many cars over his short career. I take it he was very good at what he did.

Anyways, he told us how he had just finished paying off his second or third car, and he went with his wife to work a deal to trade-in and get another. They went to get their credit checked, he was assuming great things, when the agent came back and said there was something on the report.

There was a year old charge of only $212 from some card that his wife had applied for, never heard anything, and figured it was denied and thought nothing of it again.

Here it is now, stopping them from getting another car loan when he had paid off 3 already.

Moral of the story? You are never too young or too old to check your credit!

A little man by the sea.

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