About Your Credit Score

What Is my Credit Score and Why Do I Have One?
Every American has a credit score between 400 and 850. A higher number means a better credit rating. A better credit rating means lower interest rates on loans, fewer hassles to buying a house, and an easier lifestyle.

How Is My Credit Score Determined?
Your credit score is determined by three private companies (Experian, Equifax, and TransUnion), all of whom look into your credit history and calculate a number between 400 and 850. Because each company determines your credit score differently, your score is different with each company. Therefore, in the best-case scenario, lenders get all three scores and use the middle score. However, some lenders will save some money by only purchasing your score from two of the three companies, and using the lower score in your application.

How Did This System Come to Be?
The Fair Credit Reporting Act (FCRA) of 1970 set up standards for the reporting and maintenance of consumer credit histories. However, the scoring systems used by the three credit companies were developed and implemented by these private companies without any legislation. In other words, there was no addendum to the FCRA of 1970 and so Congress did not weigh in on the decisions. The result was that suddenly, in 1997, credit scores came into being without warning, and over time have become the most important factor a lender uses to approve a loan.

The federal Fair and Accurate Credit Transaction Act (FACTA) of 2003 was implemented, in part, to protect the consumer. Unfortunately, it has set off a series of events that has made state and federal legislation regarding credit incredibly complex. The bottom line? As an average American, you can't change your credit score alone. You need expert help.

The Golden Number: 620
In order to qualify for the best interest rates advertised, you must have a score of at least 620. Home loan interest rates, car loan interest rates, student loan interest rates, and even life insurance rates increase when your credit score is low. However, if your score is 620 or above, you will get good interest rates with few hassles.

Your score is used by more people than you might think. Each of the following are affected by your credit score:

car insurance
life insurance
job applications
credit card issuance
homeowners insurance
student loan applications
car loan applications and interest rates
mortgage applications and interest rates

What Factors Affect Your Score?
Your score is determined based on the money you have borrowed (credit cards, loans, mortgages, etc.). Your performance paying back that money is reported to the three big credit companies. A missed payment (more than thirty days late) will be a negative mark on your score. Defaulting on a loan brings your score down substantially. Also, if you fail to pay other bills on time, the companies that you owe will report the debt to the credit companies.

What Else Do Lenders Look At?
If your credit score is high, but you have only one or two lines of credit (one credit card and a student loan, for example). This means that you have paid those two lines consistently, but you haven't established very much credit. Compare this to someone who has three or four credit cards and a home mortgage. You may have the same credit score, but you'll get the higher interest rates because you have less credit. Companies look at both the score and the amount of credit you have.