The Real Story …
News and commentary about the real estate market and related topics.
Dave Parrish, ABR ®, CRSA, CSP, GRI, ePRO ®, REALTOR ®, RealtySouth
Credit Scores – What They Mean… How They Impact Your Cost of Living…
Are you as confused as most people when it comes time to understand what your credit score means? It can be a little difficult to figure out what the numbers mean, and more importantly, how the credit bureaus use these scores when you need credit.
Credit scores, or FICO scores as they are also known as, are numbers that are assigned to you based on your credit history. FICO is short for Fair Isaac and Company. The information that is used in determining your FICO score comes from a variety of places including the major credit bureaus, credit card companies that have issued you a credit card, banks and other financial institutions where you have loans, and other data bases that have consumer data on them. The numbers are added up / evaluated to develop a score that is as a major factor in determining whether you qualify for low cost credit, higher risk credit, or no credit at all.
The way the scoring range works, the higher your numbers are, the better your credit is. This translates into lower interest rates on loans or other credit items. Likewise, if you have a low score you will pay higher interest rates, or possibly be turned down completely.
Generally speaking, FICO scores run from the 300 point range all the way up to 850 points. These points are then separated into six point groups as follows: Note: these ranges are not fixed in stone and have different break points for different lenders; however, the breakpoints do not vary significantly from the ranges indicated below.
720 – 850 Excellent Credit
700 – 719 Above Average Credit
675 – 699 Average Credit
620 – 674 Below Average Credit
560 – 619 Poor Credit
500 – 559 Very Poor Credit
A score below 500 will usually be declined credit, or be forced to pay extremely high interest rates. These six point groups are used by all the major credit card issuers, auto finance companies, and mortgage companies to determine if they will extend credit and how much they will charge for the privilege of credit.
As you would expect, the very best interest rates and prime lending goes to those in the top category. Although most consumers fall into the middle ranges, there is a lot of competition among credit card issuers, which means you can still get some very good deals. The recent bottom/minimum score for a home mortgage has been a FICO score of 620 with pressures moving that upward to 640 in the very near future. Correspondingly, the point at which credit is denied altogether is moving to higher levels.
But the impact of credit scores does not end with the interest rates on your mortgage, automobile loans and/or credit cards. Your credit scores are also used as a part of another score called a C.L.U.E. (Comprehensive Loss Underwriting Exchange) Report that determines how much you will pay for any type of properly casualty insurance… most notably: Homeowners / Hazard Insurance or Automobile Insurance.
Finally, you should be aware that increasingly your credit scores may be reviewed as a part of your application for a job. For years your credit rating has been an important factor in employment at almost any financial institution. However, now they are being considered for other positions as well. So the cost of bad credit can be far reaching.
In the coming weeks, I’ll review how credit scores are determined and what can be done to protect and improve your scores.
