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CREDIT SCORES

What are credit scores and why are they important? What types of credit scores exist?

A credit score is used to predict the likelihood that you will not pay a debt on time, at all or if you will file for bankruptcy. Scores are calculated based upon your credit history. Lenders use credit scores to determine whether or not to issue you a loan, and if they do, at what interest rate and for how long.

Credit scorers such as FICO® and VantageScore® are used by most consumer lenders in the United States. Their scoring methodologies are built upon a sampling of all credit-using adults in the United States who have histories reported to the three main credit bureaus. Individual lenders also build and utilize their own credit scores, referred to as custom scores, using the histories of their own borrowers. Because of this, custom scores are often more accurate at predicting delinquency for the lender who developed them for their own use.

How do I know if my credit score is good or bad?

Your credit score is a three-digit number that ranges from 300 to 850. This score is generated by an algorithm based on the information in your credit report, and it is used by lenders to determine the amount of risk associated with lending you money. The predominant credit-scoring model is the FICO® Score. This scoring model was created by the Fair Isaac Corporation, and it is used by 90% of financial institutions in the United States to make lending decisions. Every person with a credit history has three FICO® Scores, each generated by the three major credit bureaus — Equifax, TransUnion and Experian.

The VantageScore® is a newer scoring model that was created as a joint venture by Equifax, TransUnion and Experian. This model competes directly with the FICO® score, but it is only used by about 10% of financial institutions to make lending decisions. However, six out of ten of the largest banks in the U.S. now use VantageScore.

In general, the FICO® Score and VantageScore® ranges are:

  • 300 – 580 = very poor
  • 580 – 640 = poor
  • 640- 700 = fair to good
  • 700 – 750 = very good
  • 750 – 850 = excellent

The interest rates, fees, loan amounts and terms that lenders offer you will correspond to this score range. The higher the score the better the terms, the lower the score the worse the terms. To find out what your credit score is, you can obtain it from any of the major credit bureaus or any of the various credit score providers.

What score do I need to get a loan? What terms can I expect given my current credit score?

Unfortunately, there is no “scoring chart” consumers can check to see what rate and terms they can expect on a loan based on current credit scores. For example, suppose you fall into the “fair” range. While you can check to see what the prevailing rates are, the problem is finding out exactly what someone with fair credit can expect to get. Prevailing rates are not linked to a specific credit score range. They depend on individual lender criteria and policies, and are usually calculated in two to three seconds by decision-making technology.

Some lenders also utilize pre-qualification credit inquiries to pre-qualify customers for loan products, and to present rates and terms. If customers like the terms being offered, they can then make an application for credit and, in most cases, be approved if the necessary documentation is provided.

At a minimum, the best case scenario when looking for a loan is to know your credit score. Get pre-qualified or apply at one or two lenders whose current rates and terms you’ve researched, and preferably with whom you’ve had a prior relationship. There can be more than a one percent difference between lenders and over time, that difference can certainly add up.

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