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What is a Credit Score?

Credit Scores

It has become increasingly common for lenders to use your credit score to decide whether to grant you credit and what rate to charge you. Your credit score is calculated based on information in your credit report. If you are buying a car or home, it is a good idea to check your score before you apply for credit.

A credit score helps lenders predict how likely it is that you will repay a loan and make payments when they are due.

Your credit score is calculated based on information in your credit report such as:

  • Whether you pay your bills on time
  • The number and type of accounts you have (credit cards, auto loans, mortgages, etc.) and how long they have been open
  • How much of your available credit you are currently using
  • The amount of your outstanding debt and monthly payments
  • Whether you have any collection actions against you

FICO Score

Your FICO Score (Fair Isaac Corporation) is a primary credit scoring model and ranges from a low score of 300 to a maximum score of 850.

The FICO model weights several factors to determine your score:

  • Past payment history=35%
  • Outstanding debt=30%
  • How long you have had credit=15%
  • New applications for credit=10%
  • Types of credit=10%

Vantage Score

Vantage Score is a newer credit scoring system offered by all three credit reporting agencies. The Vantage Score ranges from 501 to 990.

The Vantage Score groups scores into letter categories covering an approximately 100-point range, just like grades you receive on a report card. For example, your Vantage grade would be A if you had a Vantage score between 901 and 990.


What is a Good Credit Score?

It is very difficult to say what is a good or a bad credit score since lenders have different standards for how much risk they will accept. A score that one lender considers satisfactory may be regarded as unsatisfactory by other lenders, but, generally, the lower you score, the more you will pay to borrow money – if you can borrow money at all.

But credit scores change over time. You can improve your score over time by paying bills on time and using credit responsibly.

The most important thing to remember when it comes to obtaining a loan or a credit card is that the better your credit score is the more likely you are to get a lower interest rate and pay less for borrowing money. This is true for virtually all lenders.

When you see rates and credit cards advertised, they are generally directed to consumers with outstanding, or prime, credit score – those above, say 720. You may still be able to obtain the same products and services with less than a prime score, but you may only qualify for a higher rate.

To ensure accuracy and consistency of your information, you should obtain a copy of your credit report from each credit reporting agency.


Inquiries May or May Not Affect Your Credit Score

It is important to know that inquiries may affect your credit score. The inquiries section of your credit report contains a list of everyone who accessed your credit report within the last two years. Applying for a credit card or loan may slightly lower your credit score.

Inquiries from lenders and potential creditors can be a factor in your credit score. Your credit score may be lowered somewhat when your credit report shows multiple inquiries as a result of you applying for multiple new credit lines in a short period of time (as opposed to rate shopping for a mortgage or auto loan).

Numerous inquiries on your credit report may suggest that you could be having financial troubles or are becoming too deep in debt. Checking your own credit will not impact your credit score.


Will Shopping Around for a Car or Home Loans Hurt My Credit Score?

When buying a car or a home, it is important to shop around for the best mortgage or loan. While shopping around may cause multiple lenders to request your credit report, your credit score will not be harmed.

Shopping for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you are only looking for one loan.

To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring.

After 30 days, multiple inquiries relating to a mortgage or auto loan application in a typical shopping period are treated as one inquiry.

That means that your credit score is not harmed by shopping around for the best car or home loan.


Reasons a Loan Application May Be Denied

Credit reports will be used in many of the financial aspects of your life for insurance, such as when you apply for a loan, for a job, to rent an apartment or negotiate the amount of your security deposit.

Lenders will review your credit history before approving a loan request. They may deny your application if you have bad credit history, but they will also deny it if you have no credit history.

Bad Credit History

  • Credit problems indicate you are a higher risk and might not repay the loan.

No Credit History

  • Lenders may not want to lend you money because you have no experience with credit and an unknown risk.
  • However, some lenders may offer you other options, or counteroffers, such as:
    • A higher rate to compensate for the higher risk
    • Reconsideration of your application if you obtain a co-signer
    • An opportunity to support your application by presenting bills you have paid promptly for rent, telephone, or utilities
    • Presenting a bank savings statement that shows consistent deposits over a period of time