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Revealed – The 4 Greatest Myths Of Credit Scoring

Credit Score highlighted in yellowHaving a poor credit score is no big deal, right?

Wrong.

A poor or bad credit score has some very serious consequences. For one thing it will cost you money. This is because there is an inverse ratio between your credit score and the interest rates you’ll be charged. In other words the lower your credit score the higher will be your interest rates. While this may not have much of an effect on a short term personal loan or a small credit card balance it can mean big money when it comes to auto loans, mortgages and other types of secured loans. As an example of this, a 30-year loan for $165,000 at 3.93% will have a monthly payment of $786. However, if have bad credit and are charged 4.46% (just half a point more) your monthly payment would jump to $830 per month. This would be a whopping $16,560 over the life of your loan.

In addition, if you have a poor credit score you may have to pay more for your auto insurance and might not be able to rent an apartment or get your utilities turned on.

Where do you stand?

Lenders usually evaluate credit scores in terms of these ranges:

• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score
• Between 620 and 679 – Average or OK score
• Between 580 and 619 – Low credit score
• Between 500 and 579 – Poor credit score
• Between 300 and 499 – Bad credit score

If you know your credit score you now know how lenders will view you. If you don’t know your credit score, it’s time you got it. You can get it free (once a year) from any of the three credit reporting bureaus – Experian, Equifax and TransUnion – or at the website www.annualcreditreport.com. You can also get your score at www.myfico.com, which might be your best option as it’s the score most often used by lenders. The other credit scores such as the ones you would get from Experian and TransUnion will not be identical to your FICO score. But one of these should be close enough for you to know where you stand and how you would be viewed by a potential lender.

Great myth #1: A minor late payment won’t hurt your credit scoregrandma looking shocked

It’s said that a minor late payment won’t hurt your credit score if you quickly catch that account back up. While this may be true it’s only if that late payment is isolated and historical, which means the account is not currently delinquent.

There are two categories of derogatory information in the world of credit scoring. They are minor and major. The line that divides these two categories is very clear. If you have a historical delinquency that didn’t go past due by 90 days or more, it would be considered a minor derogatory item. This category also includes historical 30- and 60-day delinquencies. Everything else is considered to be a major derogatory item. This would include defaults tax liens, collections, judgments, repossessions, foreclosures, bankruptcy, any account that is 90 days late or worse and accounts that are currently delinquent.

If you are currently 30 days delinquent on a debt your score will be lower than if you had never been delinquent on anything. In fact it will be considerably lower − probably by 35 to 50 points. If you are more than 60 days delinquent on paying a bill (but not in default) it gets worse. Your score would probably be 100 points lower than someone who had never missed a payment.

Why do these cause your credit score to drop?

A scoring system such as FICO or VantageScore is aimed at predicting how likely it is that you will go delinquent by 90 days soon after you apply for credit. If you are currently delinquent – even for just 30 or 60 days – you make the credit score’s job simple because you’ve basically proved that you’re willing to be past due on credit obligations. This is what causes that drastic drop in your score.

Not well known

There is something else you should know about your credit score that is not a secret but isn’t well known by many consumers. It’s that if you have a “30-day late” on one of your credit reports this means you’re at least 30 days late on that bill and probably even later. This is because lenders are not allowed to report your late payments to the credit bureaus until you’ve gone a full 30 days past the due date. If you’re just a week or two behind on a loan payment this won’t be on your credit reports though you will likely have to pay a late fee. So, if there is a “30-day late” on your credit report, this actually means you’re 30 to 59 days late on that bill. And if you find a “60 day late” on your credit report, this really means you’re 60 to 89 days late on that obligation and so on.

The point here is that if you have a “30 day late” on your credit reports it’s likely that you’re really 40, 50 or more than 60 days late. This is another reason why FICO and VantageScore are so tough on consumers who have accounts that are currently delinquent.

Man climbing range of credit scoresGreat myth #2: All I have to do is catch up on the payment

A second great myth about credit scoring is that if you just catch up on your payment and avoid going 90 days past due your score will recover. This is true to an extent as your score will bounce back but not entirely. The reason for this is that lenders update your credit reports only once a month. In the event that you have an account that is showing up as being currently past due, it will actually be that way for an entire month. And it’s likely that your credit score will be lower and even considerably lower for 30 days.

“Account maintenance”

Many finance and credit card companies pull your credit scores every month just to determine if they want to continue to do business with you. This is called either “account management” or “account maintenance.” When you review your credit reports you may find a long list of inquiries that fall into those two categories. The problem with this is that if a creditor pulls your credit score during their account management process and sees that it has dropped because you have a currently late account, it’s likely to react by lowering your credit limits, closing your account or raising your interest rates.

Great myth #3: Your credit scores will take care of themselves if you just handle your finances responsibly

Remember what we wrote in an above paragraph that credit scores are a way to predict how you will handle credit in the future. If you quit using credit or use it in a way that the credit scoring formulas don’t like such as using just one card, closing down a bunch of accounts or maxing out your cards – even if you pay them off in full – your scores could go down. This is because it will look as if you were having some problem with credit.

Great Myth #4: Checking your credit will hurt your credit score

The truth is that getting your own credit report and scores will not affect your credit scores. Period. On the other hand if you were to ask a friend or relative at a car dealership or bank to pull your credit reports this would likely be treated as a “hard” inquiry and would ding your credit score. But it’s a non-event when you check your own credit.

This is a very bad myth because it can keep people from checking their credit reports to see what’s going on with their credit and their scores. A recent survey found that about 20% of all U.S. credit reports contain errors and that 5% have errors so serious they are damaging people’s credit scores and causing them to be turned down for loans or paying much higher interest rates. You really need to go to www.annualcreditreport.com at least once a year to get your credit reports from the three credit bureaus so that you could dispute any errors you find. And if you’re about to apply for a major loan such as an auto loan or mortgage, you should go to ww.myfico.com and buy your score so that you can see how lenders will view your application. Plus, you will get some good tips th`ere for improving your numbers.

Speaking of credit reports

If you’d like to know more about credit reports and how credit reporting works, here’s a short video that offers  some good information.

 

Why Your Credit Score Might Not Be As Wonderful As You Think

Credit Score highlighted in yellowYou say that you checked your credit score recently and that it’s great. Maybe you got your FICO score and it was 790. So you feel as if you were sitting on top of the credit world. Well, you might need to think again.

Great could be mediocre

As an example of this, your FICO score of 790 could be just mediocre on the VantageScore, which goes to 990. Beyond this, the eight credit scores most commonly used by lenders range from as low as 150 up to 990. Why is this? It’s because the three major credit bureaus – Experian, Equifax and TransUnion –have their own scoring models. The credit bureau TransUnion has its TransRisk scores that range from 300 to 850, while Equifax’s Credit Score goes from 280 to 850. In addition, there is an Experian score that goes from 360 to 840 and another that ranges from 330 to 830. And then there’s the VantageScore that the three credit bureaus created and that goes from 501 to 990.

What this means to you

What all of these scores mean to you is that it’s hard to determine how you would actually be evaluated by a potential lender. It’s true that most of them check FICO scores to determine how much risk an applicant represents but we consumers often get our scores from the credit bureaus and consumer websites such as CreditKarma.com or CreditSesame.com. While these non-FICO scores should be close to our true FICO scores, it can still be confusing.

Doesn’t make much sense

We’ve all grown up with systems that are A through F or 0 through 100 but now we have all these different ranges that can be bewildering. You might think you have a terrific score of 800 and then learn that it’s a VantageScore and maybe not so good. Or you might see that you have a score of 900 and think that this is wrong because you know that the FICO score tops out at 850. The problem is that you may not realize that the score you got was the VantageScore with it’s higher range.

In the same ballpark

Most scoring models – aside from the VantageScore – are not much different from the FICO’s range of 300 to 850. This means it’s generally okay to assume that your non-FICO score will be at least in the same ballpark. However, if you get a VantageScore and you assume that it’s identical to your FICO score, you may be in for a disappointment when you next apply for credit.

To see where you stand

If you want to get an idea of how you stand vs. credit applicants, you need to look at where you fall relative to the national percentile. As an example of this, to get the best credit you generally would need to fall in at least the 50th percentile. This converts to a FICO score of around 720.

This video from TransUnion explains more about credit scores, why they can different and why it’s important to pay your bills on time every month.

49 FICO scores

To make matters even worse, lenders aren’t neessarily looking at the same scores themselves. Within the FICO category, lenders could look at one of more than 49 different scores to assess your risk. In comparison, consumers usually get just their one standard FICO score. And research has shown that 20% of consumers will receive a score that is “meaningfully different” from the score that was used by the lender when deciding whether or not to grant credit.

Why so many FICO scores?

This is due to the fact that a potential lender can look at a different FICO score depending on the type of credit that you’ve applied for. If you apply for an auto loan, the lender might look up your FICO auto score. If you apply for a new credit card there is a specific FICO bankcard score your lender could check. There are also FICO mortgage loan scores and installment loan scores that focus on your history of how you’ve used finance companies. Plus, there is your generic FICO score, which is the most widely used, and is calculated based on your history with all the types of credit you’ve used.

How your FICO score is calculated

Your generic FICO score is based on five components.

  • Payment history
  • Credit utilization
  • Length of credit history
  • Types of credit used
  • Recent searches for credit

The top two, payment history and credit utilization together account for 65% of your credit score. What this translates into is that the most important things you can do to have a good credit score is first, make all of your payments on time all the time. And second, don’t use up a high percentage of the credit you have available. As an example of this, suppose that you have total credit limits of $10,000. In this case, you should not have combined balances of more than $3000, which would yield a credit utilization ratio of 30%.

Who do you trust?stressed old man

So with all of these different credit scores and credit score ranges, who should you trust? The best answer is to get your generic FICO score. It’s available on the website www.myfico.com for $19.95 or you could get it free if you sign up for a free trial of the company’s Score Watch program. But you might want to supplement this by getting your free score periodically from one of the three credit bureaus or a consumer website. The reason for this is because your credit score is not static. It’s generated every time you apply for credit. This means it could change literally from week to week.

One Simple Trick That Could Improve Your Credit Score By 30 To 40 Points

Girl with one hand on laptop, the other giving a thumbs upIf you applied for a loan before the 1980s, your lender would have to order your credit reports and then review each one of them line by line. This was not only time-consuming but meant a subjective opinion and left room for human error. In other words, two potential lenders could review the same credit reports but come to very different conclusions as to your credit worthiness.

Along came Fair Isaac

The company that was then known as Fair Isaac Corporation (now known as FICO) changed things dramatically when it created credit scoring. The short explanation of how this works is that FICO assigns points on the variables that make up a person’s credit report. It then uses statistical models that consider many different variables and combinations of variables – to ultimately yield one 3-digit number or credit score. Credit scoring quickly caught on with lenders for two reasons. First, it took all the subjectivity out of rating a person’s credit worthiness and second, it helped consumers get the credit they needed much faster.

How credit scoring works

No one but FICO knows precisely how its credit scoring works but it is known that your score is made up of five components.

  1. Payment history – or how you’ve used credit, which makes up 35% of your score
  2. Credit utilization – how much credit you’ve used vs. the amount you have available, which is 30% of your score
  3. Length of credit history – or how long you’ve had credit, which is 15% of your score
  4. Types of credit used – the different types of credit you’ve had such as credit cards and an auto loan, which makes up 10% of your credit score
  5. Recent searches for credit – or the number of times you’ve applied for credit, which equals 10% of your credit score.

If you’re interested in learning a bit more about these five components and why you should never close a credit card, be sure to watch this video.

Do the math

When you do the math, adding up your payment history and your credit utilization, you’ll get 65%. What this means is that the biggest factor in your credit score is how you’ve used credit, that is how good you’ve been about making your payments and how much of your credit you’ve used vs. the amount you have available. This is based on what’s called your debt-to-credit ratio. For example, suppose you have a total credit limit of $10,000 and have used up $3000 of it. In this case your debt-to-credit ratio would be 30%, which would be fairly acceptable. Any ratio higher than this would have a negative effect on your credit score.

The simple trick

Obviously there is very little you can do about your payment history because, after all, it is history. However, you could make a dramatic change in your debt-to-credit ratio, which might boost your credit score by as many as 30 to 40 points. There are two ways to do this. First, you could pay down some of your debt. As an example of this, suppose you had a debt-to-credit ratio of 50% because you had charged up $5000 against a total credit limit of $10,000. If you were able to pay down that $5000 to $3000, you would now have a debt-to-credit ratio of 30% and should see a nice boost in your credit score.

The second option

If there are reasons why you can’t pay down your debt, there is still a simple trick you could use to improve your debt-to-credit ratio. It’s to get your credit limits raised. This can be tough to do but if you have a good payment history with one or more of your credit card providers, you could contact them and ask for an increase in your credit limits. If you were able to get your total credit available raised to, say, $15,000 and owed the same $5,000, your debt-to-credit ratio would go down from 50% to 33%, which should produce a good jump in your credit score.

How to improve your payment history

We said earlier that there is very little you can do to change your payment history but it’s possible you could improve it. First, you would need to get your credit reports from Experian, Equifax and TransUnion. They are required by law to provide you with your credit report free once a year. You could call or write each of these companies and request your credit report or go to the site www.annualcreditreport.com and get all three simultaneously. Then second, you would need to go over your reports very carefully looking for negative items such as.

  • Late payments
  • Defaults
  • Collection accounts
  • Foreclosures
  • Liens

Look for errors

It’s possible that there may be negative item on one of your credit reports that’s an error. If so, you need to immediately dispute it. The way you do this is by writing a letter to the relevant credit bureau, along with whatever documentation you have that would support your claim. You should also send a copy of your letter and documentation to the institution that provided the erroneous information. Once the credit bureau receives your letter, it is required to contact the company that provided the information and ask for it to be verified. In the event the company cannot do this or doesn’t respond within 30 days, the credit bureau must remove it from your credit report.

What this could accomplishwoman with a laptop and holding a credit card

If you were able to get one of these negative items removed from your credit report, you should see an immediate increase in your credit score. As an example of this, many experts believe that one late payment could drop your score by his many as 60 points. If you were able to get that late payment removed from your credit reports, you should almost instantly see a 60-point bump, which could take you from having “average” credit to “good” credit.

Big Changes Are Coming To Credit Scores

how debt relief affects credit scoreYou do know about credit scores, right? If you don’t, it’s three numbers that just about rule your financial life. The most trusted score, the FICO score, runs from 300 to 850. As you might guess, higher is better. People who have scores of 700 or above can get just about any type of credit, including a mortgage and an auto loan. Those who have scores of 580 or below may have trouble getting any type of credit.

To make matters even more convenient for lenders, credit scores have been divided into ranges as follows.

• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score.
• Between 620 and 679 – Average or OK score.
• Between 580 and 619 – Low credit score.
• Between 500 and 579 – Poor credit score.
• Between 300 and 499 – Bad credit score.

Whenever you apply for credit, the first thing the lender will do is get your credit score. It will then compare it to these ranges and make a decision as to whether or not to grant you credit as they depend on credit scoring to predict how you will pay your bill.

A new type of credit scores

As we noted above, the tried and true credit score is your FICO score. However, there is a new score called the VantageScore. This score was developed jointly by the three credit bureaus – Experian, Equifax and TransUnion. It is said to help lenders make better decisions and may shake up the credit scoring industry.

It could make consumers happier

There are ways that the VantageScore differs from the FICO score that could make consumers happier. One example is the way that it evaluates collection accounts. Suppose you had a medical bill or nuisance bill that ended up in collection but you paid if off. In the VantageScore model, paid collection accounts will no longer lower your credit score. Of course, unpaid collections will still damage it. But if you have paid off a collection account, it will no longer stay in your credit report for the normal seven and half years.

Credit scores for more peopleCredit Score highlighted in yellow

Another significant difference is that VantageScore 3.0 is said to provide credit scores for more consumers; about 13 million more than prior versions of the model. In fact, VantageScore claims that it should be able to score about 14 million more consumers than its competitors or a total of 27-30 million more people. How does this work? For FICO to score people, it requires at least six months of their credit histories and with at least one account reported in the previous six months. On the other hand, VantageScore requires only a one-month history and only one account reported to the agency within the past two years. What this translates into is that it’s much easier to find people with a one-month history than people whose account history goes back six months. In addition, VantageScore also generates scores for people who:

• Weren’t using credit often but did use it in the past 24 months
• Show no recent activity at all on their credit reports. The last information reported about them may have been 3-4 years ago. These consumers are relatively good quality. More than 70% percent have credit scores of 600 or better. They have had accounts for a long time but don’t use them very often.
• People who have no open accounts. These are often consumers who fall into the “subprime” category such as those who gone through a bankruptcy and consequently stopped using credit, or those whose only listed accounts have negative information.

Who these credit scores will help

VantageScore has said it believes this new scoring model could be particularly good for immigrants, people who stopped using credit during the Great Recession and retirees who are no longer using credit cards are taking out loans.

Not all mortgages are treated equally

The third innovation introduced in the VantageScore is how it gets into details about the ways we’ve handled credit before, during and after the recession. It looks at data over a longer period of time because consumers’ behavior having to do with credit has changed and credit scores have not necessarily captured this. The data becomes more detailed or more granular. As an example of this, in normal scoring models, a real estate loan is a real estate loan. But in VantageScore 3.0, a home equity line of credit is treated differently than a first mortgage. This is due to the fact that the default rate on first mortgage is twice that of HELOCs.

Will you have a higher score?

The bottom line question here is will your VantageScore be higher than your FICO score? That question will be difficult to answer until enough lenders begin using the new VantageScore 3.0, which is likely to occur later this year. If you would like to see the difference between your estimated FICO score and your VantageScore (based on its current model), you could use Credit.com’s free Credit Report Card.

For more information on why there is a new VantageScore, check out this short video from the VantageScore people.

5 Tips For Repairing Your Credit

Woman with papers and calculator looking puzzledYou just took the big step and got your credit score. Ouch! You’ve discovered it’s in the high 500s. This means you’ll have a hard time getting new credit and may not be able to buy that house you’ve been dreaming about. But don’t panic. There are literally millions of Americans in the same fix – or even worse. Plus, you can repair your credit though it will take time and a fair amount of effort.

Understanding your credit score

Here’s the simple explanation of your credit score – it’s a mathematical representation of your credit reports. Credit scoring was invented back in the 1950s as a way to standardize how people were granted or not granted credit and at what cost. Before credit scoring, lenders were forced to read every line of a credit report and then make a subjective judgment as to a person’s creditworthiness. One lender could review a report and decide the person was a bad risk while another might read the same report and decide the person was a good risk. Credit scoring has eliminated this and made things more objective as different lenders were then able to see the same score and have the same option about the person’s creditworthiness – for good or for bad.

Credit score ranges

Someone then came along and created the idea of credit score ranges, which make it even simpler for lenders. These ranges, which are based on the FICO scoring model, are as follows.

  • Between 700 and 850 – Very good or excellent credit score. one
  • Between 680 and 699 – Good credit score.
  • Between 620 and 679 – Average or OK score.
  • Between 580 and 619 – Low credit score.
  • Between 500 and 579 – Poor credit score.
  • Between 300 and 499 – Bad credit score.

How this affects borrowers

Credit scoring and credit ranges have made it very easy for lenders to determine a person’s creditworthiness. Lenders typically base your interest rate on your credit score. People with “good” or “very good” scores get the best interest rates. Conversely, people with “low” or “poor” credit scores will be charged higher interest rates because the lender believes it’s taking more of a risk. In fact, if you have a “low” credit score your mortgage could have an interest rate two points or more higher than if you had a “very good” credit score. This means that a bad credit score could cost your literally thousands of dollars more over the life of a 30-year mortgage.

Get your credit reports

If you learn you have a low credit score, the first thing you need to do is get copies of your credit reports. You have three of them as there is three credit reporting agencies, each of which keeps a credit file on you. You can get all three free at www.annualcreditreport.com.

Once you have your reports, you need to go over them carefully, looking for those negative items that are dragging down your score. This could be a lien, a judgment, a debt sent to collection, a charge off, a default, maxed out credit cards or late payments.

Step #1 in repairing your credit

Once you find the negative items in your reports that may be damaging your credit score, you need to double check to make sure they are really yours. The three credit bureaus process thousands of items a day and they can make mistakes. You might find a judgment or a charge off that was there due to an error. In this case, you will need to go to the appropriate credit bureau’s website and file a dispute. This is fairly simple as they all have online forms for this purpose. You will need to have documentation supporting your claim. If you do so, the credit bureau must contact the company that provided the information and request verification. If the company is unable to verify the negative item or if it doesn’t respond to the credit bureau within 30 days, the bureau must delete the item from your report – which could mean a nice increase in your credit score.

Pay down your balances

Your credit score is based on five components. They are.

• Payment history – 35%
• Credit utilization – 30%
• Length of credit history – 15%
• Types of credit used – 10%
• Recent searches for credit – 10%

There’s nothing you can do about your credit history as, well, it’s history. But you can do something about your credit utilization and types of credit used – that could help your credit score.

Credit utilization is the total amount of credit you have available vs. the amount you’ve utilized. For example, if you have credit cards with a total balance of $10,000 and have charged $6000 on them, you would have credit utilization or a debt-to-credit ratio of 60%. This is much too high and could be hurting your credit score. Most experts feel your debt-to-credit ratio should be 20% or less. So, if you were able to pay down your debt until you reached that 20%, your credit score should improve considerably. You might also be able to improve your types of credit used by applying for a personal loan, a personal line of credit, a homeowner’s equity line of credit or an auto loan.

Ask for more creditcredit cards

The other way to improve your debt-to-credit ratio is to increase the amount of credit you have available. To do this, you would need to contact your lenders and ask them to raise your limits. This can work if you have a great history of making your payments on time and never exceeding your limits. If not, you’ll be out of luck.

Get a secured card

Another way to improve your credit is to get what’s called a secured card. This is one where you deposit money into a savings account. The more money you deposit, the higher will be your credit limit. You can keep using the card so long as you continue depositing money. If you use it sensibly this will be reported to the credit bureaus and will eventually have a positive effect on your score. If you use the card judiciously for a year, the bank may offer you an unsecured card, which would definitely have a positive effect on your score – so long as you use it wisely.

Some other tips for improving your credit score

• Pay all your bills on time all the time
• Keep the balances low on your credit cards and other revolving types of credit
• Understand that if you close an account this doesn’t make it go away.
• Don’t close credit cards you are not using as a short-term way to raise your score.
• If you have been using credit for a only a short time, don’t open a lot of new accounts too quickly
• Have you missed payments? Then get current and stay current.
• Don’t apply for new credit accounts unless you absolutely need them.
• Be aware that if you pay off a collection account this does not remove it from your credit report.
• Pay off debt instead of just moving it around

Here’s a video with 5 more tips for raising your credit score.

“Why Do I Have A Credit Score?”

Woman holding bills in both hands and looking confusedAs you may know, your credit score is a little three-digit number that can have a big impact on your life. It will dictate whether or not you can get new credit, the interest rates you will be charged, your auto insurance premium and maybe even whether or not you will get that great new job.

Who invented credit scoring?

Credit scoring was developed by a company that used to be named Fair Isaac Corporation but is now known simply as FICO. The short explanation of your credit score is that it’s a mathematical representation of your credit reports. It’s computed using a formula or algorithm known only to FICO.

Where you can get your credit score

Given the fact that your credit score can have such a serious impact on your life, it’s important that you know what yours is. The best place to get it is the website www.myfico.com. The reason for this is because 90% of the companies that grant credit use the FICO score. There are two ways to get this score. You can either buy it for $19.95 or get it free by signing up for a trial subscription to FICO’s Score Watch program. To get more details about FICO and credit scoring, watch this video.

Why you have a credit score

Before FICO created credit scoring, lenders were required to sit down and go over people’s credit reports line by line, looking for negative items such as judgments, liens, accounts turned over for collection, charge-offs and the like. As you can imagine, this was a very time-consuming process and it often boiled down to a subjective judgment. One lender could look at a credit report and think of it as being good, while another might consider it to be bad. It was much like whether or not a glass is half empty or half full – that is much of it was in the eye of the beholder.

Credit scoring makes it simpler and less subjective

The Fair Isaac Corporation (FICO) looked at the issue and decided there was a simpler and better answer. It was to create an algorithm capable of turning credit reports into a single number. Lenders immediately leapt on this because it made their jobs much easier and removed much of the subjectivity out of assessing people’s credit worthiness. These lenders quickly created credit score ranges, which made their jobs even simpler. Here is a list of those ranges.

• Between 700 and 850 – Very good or excellent credit score
• Between 680 and 699 – Good credit score.
• Between 620 and 679 – Average or OK score.
• Between 580 and 619 – Low credit score.
• Between 500 and 579 – Poor credit score.
• Between 300 and 499 – Bad credit score.

With these ranges, all a potential lender had to do was check a person’s credit score, see which range he or she fell into and immediately decide the person’s creditworthiness. It took almost all subjectivity out of the decision making process and made all lenders equal. That is, no matter where you apply for credit, your lender will be using the same credit score.

What the three credit bureaus did with credit scoring

For reasons known only to them or maybe because of competitive issues, the three credit reporting bureaus (Experian, Equifax and TransUnion) have together created their own credit scoring model called the Vantage Score. You can usually get this score free from the three credit bureaus. However, it will not be identical to your FICO score. One reason for this is scoring ranges. FICO scores range from 300 to 850, while the Vantage Score goes from 300 to 850.

Why even bother with your Vantage Score?

The chief reason to get your Vantage Score is probably the fact that you can get it free and without having to sign up for some service. The second reason is that while your Vantage Score will not be identical to your FICO, it will give you an idea as to your creditworthiness. There’s an old saying that close only counts in hand grenades and horseshoes but it’s also true of your Vantage Score. Close is probably good enough. The one exception to this is that if you were to find your Vantage Score was on the borderline between two score ranges. In this case, you might want to buy your FICO score to learn exactly where you stand. This is because a few points could make a big difference in the interest rates you will be charged, which in turn could either cost or save you money.

Knowing your credit score puts you in the driver’s seatMan talking and pointin to second man

Another good reason for knowing your credit score is that it can put you in the driver’s seat when you apply for new credit. Let’s suppose for the sake of the example that you were to go into an automobile showroom to buy a new car. If you didn’t know your credit score, you would basically be the mercy of the store’s credit manager. But if you know your score, this puts you in a better bargaining position. You might be able to drive down your interest rate by several points, which could save you $1000 or more over the life of that loan.

To recap

To recap, now that you have read this article you have learned the following.

• Who invented credit scoring
• Were to get your credit score
• Why you have a credit score
• The reason why lenders love credit scoring
• Credit score ranges and why they are important
• What the three credit bureaus have done with credit scoring and
• How knowing your credit score can help you bargain for better interest rates

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