How lenders read – and use – your credit score
For most of history, there were no
credit scores. Credit applicants would fill out a form and lenders would look over each application individually, basing their decision to approve or reject on their judgment and intuition. This was not only extremely time consuming, but it left every application open to mistakes, bias and subjectivity.
In the 1980s, credit scoring methodology became accepted and
credit scores became widely and easily available. This created a more level playing field, with credit scores becoming accepted as an objective and consistent number representing an individual's likelihood to repay debt according to terms, based entirely on past credit history and current credit status.
Lenders use
credit scores to determine creditworthiness. But for consumers applying for credit, there is an even more important use of
credit scores: to determine the interest rate at which the credit is given. As you'll see, your
credit score has a direct effect on how much you'll pay to borrow money.
Let's look at a true life example for a $216,000 30-year, fixed-rate mortgage based on actual mortgage rates from February 2006.
If your credit score is: |
Then your interest
rate could be: |
...and your monthly
payment will be: |
760 – 850 |
6.00% |
$1,295 |
700 – 759 |
6.22% |
$1,326 |
680 – 699 |
6.40% |
$1,351 |
660 – 679 |
6.62% |
$1,382 |
640 – 659 |
7.05% |
$1,444 |
620 – 639 |
7.59% |
$1,524 |
| Average US credit score: 689. |
As you can see, a person with a
credit score of 760 or better could pay $293 less per month than a person with scores below 620 – a savings of $3,516 per year.
Now you know how lenders use your
credit score – and how important that credit score is to your ability to secure credit on the most favorable terms. So how do you maximize and protect that
credit score?
IDENTITY GUARD® - the leader in credit management services - is committed to helping consumers understand and protect their credit ratings. Our EXTRA CAUTIONSM service monitors all three major credit reporting agencies - Equifax®, Experian®and TransUnionSM - to keep you apprised of your credit score and alert you promptly to potentially suspicious changes to your credit file - minimizing the risk of real damages occuring. It's a 3-3-3 credit profile - 3 credit reports, 3 credit scores, 3-bureau monitoring.
Plus, with EXTRA CAUTIONSM, you get daily surveillance of the Internet's "financial black markets", "back alley" chat rooms and news groups. Patented scanning technology helps ensure that your important financial information is not being compromised or "swapped" in sites frequented by identity thieves.
IDENTITY GUARD also offers Credit Analyzer, an interactive, online tool that helps predict how certain actions - for example, applying for a mortgage - might affect your score.
Want even more help? IDENTITY GUARD also has Credit Education Specialists to answer questions regarding your credit report and credit score.