Debt Consolidation

The Facts About Debt

Basic Credit Hygiene: Your Credit Score

Filed under: Banks
Tags: — Written by: Simos
August 6, 2010
Is your credit score “on target” for prime rates?

Is your credit score “on target” for prime rates?
Photo by: ilco (Stock Exchange)

Previously on UWSA, we discussed your credit report, the three major credit reporting agencies, and how to obtain your report for free.

For many purposes, the information in your report is enough to gauge the health of your credit history: you’ll be able to pinpoint problem accounts, inaccuracies, and potential fraud, all of which are major sources of trouble with your credit score.

But the credit score itself is a complementary tool, a reflection of the report developed by each agency; and in virtually all cases, it isn’t free.

Before you pay to check your credit score, a little explanation is in order.

How is Your Credit Score Used?

Your credit score is a simple “shorthand” that represents your total credit history. It can be accessed quickly by banks, lenders, and retailers for purposes like extending credit and deciding terms for loans, mortgages, insurance, and other major transactions. The credit score is accessed every you are assessed as a credit risk, and is understood as a measure of how likely it is that you will meet your obligations on time and in full according to the terms of your financial agreements. As a general concept, this measure of your fitness for credit is known as your creditworthiness. With each access or “pull” of your credit score, it is adversely affected; but as we saw before, many other factors have more weight.

What Do Different Credit Scores Mean?

Your credit score can range from 300 to 850, and tends to change every 30 days as your creditors report recent news about your accounts. Though the range and the interval of updates remain constant, different lenders may interpret scores differently: for example, one lender may offer its best interest rates to customers with a 775 rating, while others may require an 800 rating. The criteria for these internal decisions vary and are generally not totally transparent to consumers, but some guidelines can definitely be understood.

Only about 2% of people are on the lowest tier of the credit score, from about 300 to 499. Anyone in this category should seriously consider credit counseling, debt consolidation, and taking a proactive strategy in dealing with creditors. Opportunities for credit are severely restricted for such consumers and they may find themselves targeted by unscrupulous lenders who operate with predatory rates.

On the other side of the range, about 13% of people in the U.S. have scores from 800 to 850. These consumers have exceptional credit and, by definition, can expect to receive the most favorable rates. These consumers shouldn’t hesitate to compare different lenders, become savvy about options, and actively seek out the best rates. From the perspective of the lenders, there is no reason not to offer them.

The median score is about 700, meaning about half of all credit-holders can be found on either side of that divide. This makes 700 the mathematical middle score, “average” for most purposes. Scores below 620 to 640 are considered “sub-prime”, and consumers with these scores are considered serious risks. When analysts refer to “subprime lending”, they mean the trend of extending large amounts of credit to borrowers in this category.

Why Is My Credit Score Low?

Aside from fraud, errors, and delinquency, there are several other reasons why credit scores might be low or lower than expected, leading to rejection when dealing with lenders. Some of these reasons are more technical than others, but it’s important to understand them to optimize your debt management and achieve lower interest rates. In a future post, we’ll discuss the reasons that a particular request for credit might be rejected, what each one means, and how to address them.

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