“Why Do I Have A Credit Score?”

As 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 seat

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