May 17, 2024 8:17 AM in Menlo Park, CA
Credit Scores Explained
Definition
A credit score is a three digit number, ranging from 300 to 900, depending on which company compiles the score, and how the score is compiled. In short, the higher the score the better. Borrowers with high scores have access to the best rates, as they're considered to be the best risk.
Two Types of Scores
The first widely used score was the so called FICO ("figh-ko") score developed by Fair Isaac Corporation. The purpose of this score was to grade a borrower based on his/her credit management. Those with established credit and timely payments receive a high score, and those with credit blemishes (late payments, foreclosure, repossession, bankruptcy) receive a lower score. FICO scores range from 350 to 850, although it is rare to see numbers at the very low end, or very high end.
Individual credit gathering agencies, such as Experian or TransUnion, use their data to generate FICO scores. Unfortunately, because the credit data is not consistent between one agency and the next, credit scores almost always vary and thus lead to to confusion. In consideration of this, if three credit scores are available the lender may take the middle score and disregard the other two.
A more recent development has been the creation of a so called VantageScore. It's a combined venture from Equifax Inc., Experian and TransUnion, the three largest credit gathering agencies in the country. Their mission is to provide a more consistant score, thereby making it easier for lenders and borrowers to understand credit worthiness. VantageScores range from 501 to 990, and are categorized by the familiar academic grading system. Scores above 900 receive an "A", scores in the 800's get a "B", ad so on.
Benefits
Credit scores are a somewhat crude but effective way of categorizing borrowers, and perhaps may lead to consumers exercising more credit responsibility if they understand the significance of the score. Lenders will not have to scour credit reports for payment history, and can tailor loan products to those consumers with higher scores. However, credit scores have their flaws. For example, some lenders have a "cut-off" point, and if a borrower's score is a point or two below the cut-off, that borrowr's score may fall into a less desired category.
Keeping Score
Credit scores are notoriously difficult to improve (or repair) once they fall. The best way to keep yourself in good credit standing is to never let your credit performance lapse, and to monitor your credit file annually. In short, do everything you can to maintain your good credit. It's far easier to maintain a score, than it is to repair one.
Getting a Loan
A low credit score should not stop you from applying for a loan. lenders will compete for business in and nearby cities, regardless of your score. To get up to four quotes from a lender who understands credit scores click here.
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