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12/5/07

What Does a Credit Score Mean to You?

There are many frequently asked questions by people who are not entirely clear as to the significance of a credit score. These people understand that a high credit score is good because it will help them get loan approvals and lower interest rates, but these same people do not know how high their credit score needs to be in order to obtain these advantages.

A FICO score ranges between 300 to 850. Obliviously, if you have a credit score of 850 you have nothing to worry about. You have reached the pinnacle of credit worthiness and will get the best interest rate and best loan, guaranteed. However, what if I have a score of 720? Will a score of 720 get me a better interest rate than a score of 715? A score of 720 is higher than 715, thus, many would conclude that a 720 would get favorable interest rates and loans. However, such is not the case. Lender will treat a score of 715 and a score of 720 the same. Why?

In addition to being scaled between 300 to 850, most lenders create credit score categories. These categories have various different names depending on the lender, but generally, the credit scores are broken into 5 categories and have names similar to (1) Poor; (2) Fair; (3) Average; (4) Good; and (5) Excellent. The lender will then take your score and put it into the appropriate category. Once you are placed in a particular category, you are given interest rates and loan terms based upon that category.

Generally, a lender’s ratings are as follows: (1) Poor is equal to credit scores 619 and below; (2) Fair is equal to credit scores 620-659; (3) Average is equal to credit scores 660-720; (4) Good is equal to credit scores 721-749; and (5) Excellent is equal to credit scores 750 and over. So, what is the point I am making? The point is, a score of 715 is not different from 720 for lending purposes. Therefore, you do not need to worry about these couple of points when applying for a loan. The only thing you should worry about is the point difference between the categories. In other words, if you have a 720, you should try to boost your score a couple of points so that you can get the more favorable terms and interest rates given in the “Good” category.

Additionally, remember that your credit score is based upon the time it is pulled. Therefore, your 720 today could be 718 or 725 tomorrow. Everything such as paying a bill, taking out a loan, getting a new credit card, getting a larger credit line on an existing credit card, and/or having a credit card for more than three years will affect you credit score. Because many people do at least one of these things several times per month, your score will thus change several times per month. This is one of the reasons why lenders do the category system.

The point is, take care of your credit score, do not worry about the points in the same category (because, based on our example, a 660 will get the same rates and loans as a 720), and strive to get your score into the highest category.



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