Credit Scores
FICO Credit Scores Affect Loan Deals
Lenders use credit scores to determine the credit deal they can offer you.
Your credit score is based on information in your credit record.
Since March 2001, thanks to legislation
from California, for a small fee, currently $13, you can get your credit score
through Equifax
and Fair, Isaac & Company (FICO).
Knowing your score may help you get better credit terms. With lower interest
rates, home buyers and those seeking to re-finance a mortgage, stand to benefit.
Three out of four mortgage lenders use FICO scores to sort through loans. Plus,
most car loan firms also depend on a borrower's FICO score.
FICO scores range from 300 to 850. If you have a higher score, a lender may
charge you lower interest rates. Most lenders use scores that start between 720
and 740 to determine their best borrowing package.
For example, a lender may offer a 7.1% rate for an auto loan for scores above
720; a 9% rate for scores between 680 and 719; 10% for scores between 640 and
679, and 11% for scores under 640.
If you order a credit score, included with the report are several reason
codes. These represent the top reasons why your score was not higher. The total
score is a combination of your credit actions in five broad categories: payment
history; amounts owed; length of credit history; new credit; and types of credit
use.
Payment history, defined as whether you pay your bills on time accounts for
35 percent of your score. Amounts owed is next in importance and accounts for 30
percent of your score. The lower your balances on credit cards, car loans, and
student loans the better. Paying off debt and keeping balances low will help
improve your score. However, low balances may be a little better than no
balances at all to provide more information on how well you manage debt.
Credit history accounts for 15 percent of a score. The longer you have
maintained an account, the higher the score. If you want to improve your score,
closing accounts may not help. You are left with newer accounts which may lower
your score. Or don't open new accounts unless you have a good reason. New
accounts will lower your credit history score.
Study the reasons for your score and take some action to improve it. For
starters, correct any errors, first by phone. Then follow-up with a written
statement to the credit bureau. Next, act to improve your score. Concentrate
first on prompt bill paying and paying down or off balances as these items
contribute the most to your score. You might want to read the information on the
FICO web site to get more ideas. Or talk to a credit counselor or lender and ask
for suggestions on what to do to qualify for good loan rates.
Other national credit bureaus, Experian
and Trans
Union, also offer credit reports and credit scores online.
Unfortunately, the information at
the three national credit bureaus may not be the same. If you are on a score
bubble, you might want to order a report from more than one reporting service.
For more information on current lending rates check your local or regional
newspaper or Bankrate.com
.
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