By Amy Blakeslee
Apr 27, 2010
You and your wife decide it’s finally time to trade in your old Mustang and get a new minivan. You’ve had that car since college but now it doesn’t meet the needs of your growing family. Your wife complains every time she has to flip up the front seat to squeeze the infant car seat onto its base in the backseat. And there is little space to store all the baby toys and diapers you now have to haul around with you.
So, you head to the car dealer to pick out your new family vehicle. You spend an hour with the salesman, only to be told by the finance department that you don’t qualify for financing because your credit score is too low. Your free spending habits when you were younger have caught up with you. Now is the time to understand what a credit score is, how a high credit score compares to a low one and the affect a high credit score has on your purchasing ability.
What is a credit score?
A credit score is a numerical representation of your financial worthiness. It is calculated based on information contained in your credit report for your credit obligations such as mortgage or rent, car loans, student loans, and credit cards. The more positive information contained in report, the higher your credit score will be. It is important that you do not have any negative entries on your credit report if your goal is a high credit score. Negative information includes frequent late payments, charge-offs, bankruptcy, debt collections, tax liens, judgments and foreclosures.
Banks, credit card companies and other lenders use your credit score to determine if they will lend to you, how much they will lend to you and at what interest rate. You will usually find that lenders will give you a lower interest rate if you have a high credit score. Landlords, utilities, cable providers and mobile phone carriers will also use your credit score to determine your ability to pay for housing or the services provided.
There are three major credit reporting agencies that keep track of your information; Equifax, Experian and TransUnion. Each agency maintains its own set of records about you so it is common for your information to not match between each agency. To make it more confusing, each agency also has its own formula for calculating your credit worthiness.
What is a high credit score?
The most widely used credit score is called the FICO score, developed by the Fair Isaac Corporation. It is based on your payment history, how much you owe, the types of credit accounts you have, the length of your credit history and how much credit you have recently applied for. Equifax and TransUnion calculate your FICO score but Experian uses the PLUS method. In 2006, the three credit bureaus joined together to create yet another scoring model called Vantage, to provide more predictable, consistent credit scores.
FICO
FICO scores can be interpreted as follows:
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Score Range
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Meaning
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How It Affects Your Credit
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800-850
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Excellent
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You will be approved by any lender or financial institution and you will receive the lowest interest rates available.
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700-799
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Very good
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You will usually be approved for most credit applications and will get good interest rates.
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680-699
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Good
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You will usually be approved but interest rates will start to climb.
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620-679
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Fair
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You may not be approved for all loads, certain restrictions may apply and interest rates will not be the best.
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580-619
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Poor
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You may still qualify for an unsecured loan but terms will be strict and interest rates may be very high.
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500-579
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Bad
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If you do get a loan, it will not be what you expect.
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300-499
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Very Bad
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You may get a loan from a sub-prime lender, if you are lucky.
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Keep in mind that since they use different methods for calculating your score and each has a different set of data about you, it’s not uncommon for Equifax and TransUnion to report different scores for you.
PLUS
Experian provides a PLUS credit score, using a similar formula as FICO. PLUS stands for Plan, Live, Understand, Succeed. PLUS scores range from 330 to 830 and the meaning of the ratings are similar to the FICO ranges.
VANTAGE
The Vantage model assigns a letter grade to your credit score to determine your credit worthiness. A high grade means a high credit score. The grades can be broken down as such:
901 – 990 = A
801 – 900 = B
701 – 800 = C
601 – 700 = D
501 – 600 = F
How Do I Get a High Credit Score?
To get (and keep) a high credit score you must pay your bills on time every month and never take out more credit than is reasonable for your income. Some people feel that it is better to not take on any debt but you can’t get a high credit score unless you prove you can deal with credit responsibly. So don’t shy away from taking out loans or getting credit cards, just make sure that you can handle it financially.
You should also keep on top of your credit reports to make sure that no adverse or incorrect items are being reported by the bureaus. Each agency will provide you with a free copy of your credit report once every twelve months and you can receive your credit score for an additional fee. You can also sign up for a credit monitoring service; for a small monthly fee they will proactively monitor your account and alert you when your report changes.
You can see how important a high credit score is for you and your family. With it, you can save money by getting lower interest rates, qualify for higher mortgages to get the house of your dreams and have peace of mind knowing that you can take out a loan for any family need.
See your Credit Score for $0 at zendough by TransUnion. It’s Free and available in seconds.
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