|How credit scores work, how a score is calculated|
|By Pat Curry
Ever wonder why you can go online
and be approved for credit within 60 seconds? Or get prequalified
for a car without anyone even asking you how much money you make?
Or why you get one interest rate on loans, while your neighbor gets
The answer is credit scoring.
credit score is a number generated by a mathematical algorithm -- a formula --
based on information in your credit report, compared to information on tens of
millions of other people. The resulting number is a highly accurate prediction
of how likely you are to pay your bills.
If it sounds arcane
and unimportant, you couldn't be more wrong. Credit scores are used extensively,
and if you've gotten a mortgage, a car loan, a credit card or auto insurance,
the rate you received was directly related to your credit score. The higher the
number, the better you look to lenders. People with the highest scores get the
lowest interest rates.
The scale runs from 300 to 850. The vast majority of people will have scores between
600 and 800. A score of 720 or higher will get you the most favorable interest
rates on a mortgage, according to data from Fair Isaac Corp., a California-based
company that developed the credit score. (Its own score is called the FICO score.)
Isaac reports that the American public's credit scores break out along these lines:
|499 and below|| 1
|800 and above||11
What's the big
Your credit score will determine if you get credit at all, and
the interest rate on that credit, says Ed Ojdana, president of Experian Consumer
Direct, part of Experian, the largest of the three major credit-reporting agencies.
"The better the score, the lower the interest rate and that can save you
a ton of money."
The difference in the interest rates
offered to a person with a score of 520 and a person with a 720 score is 3.45
percentage points, according to Fair
Isaac's Web site. On a $100,000, 30-year mortgage, that difference would cost
more than $85,000 extra in interest charges, according to Bankrate.com's mortgage
calculator. The difference in the monthly payment alone would be about $235.
If you rented an apartment, got braces, bought cell phone
service, applied for a job that involved handling a lot of money, or needed to
get utilities connected, there's a good chance your score was pulled.
you have an existing credit card, the issuer is likely to look at your credit
score to decide whether to increase your credit line -- or charge you a higher
interest rate, according to a credit scoring study by the Consumer Federation
of America and the National Credit Reporting Association.
a car? Most car dealers want to know your credit score when you walk in the door,
says Bob Kurilko, vice president of marketing and industry communications for
Edmunds.com, an online consumer
resource for automotive issues. "They want to know how they can put a loan
together for you."
The score has made it easier for many
people to get credit, Kurilko says.