Chances are you have no idea. But lenders use these scores when making loan
decisions, so take steps to improve your score before asking for a loan.
There's nothing like bad credit to wreak havoc in your life. That's why, in
addition to paying your bills on time, it's important to check your credit
reports for accuracy several months before applying for a mortgage or car loan.
While you've long been able to order your credit report, now you can also get
your credit score -- the number lenders use to decide how likely you are to
repay a loan.
Equifax is the first and, to
date, the only one of the nation's three credit bureaus to sell consumers their
FICO score - the most widely used credit score. It is doing so in alliance with
Fair, Isaac and Co., which developed the FICO scoring system. The other two
bureaus -- Experian
and TransUnion - offer
their own credit scores, which give you a good idea of how creditworthy you are
in the eyes of lenders.
Why do you need to know your scores? Because a low score can cost you big. The
lower your score, the higher risk you pose to a lender and the less likely you
are to get the best rates on loans. Checking your scores before you apply for a
loan can save you plenty.
What the numbers mean
There is no single cut-off point below which no lender will help you out. True,
some lenders will only consider people with low credit risk. But others target
the "sub-prime" market and some handle a wide range of borrowers. In
general, FICO scores from 680 to 800 are considered good by traditional lenders.
If your score falls between 620 and 679, which is considered slightly below
average, you may be subject to higher rates and lenders may request more
collateral before they approve a loan. Below 620? This group is considered
sub-prime; lenders will want more money down and charge higher rates.
Several factors go into your score, including outstanding debt, late payments,
bankruptcies, how many years you've had credit, and the number of new credit
applications you've made. Most consumers' FICO scores fall between 300 to 850
(the higher your score, the better risk you are for the bank). Sixty percent
score above 700; 27 percent score between 600 and 699; and 12 percent score
between 500 and 599.
If you score 590 and want to buy a car, you may still be able to get a car loan
-- but at a high interest rate. If the average rate on a 5-year car loan is 8
percent at the time you apply, you may get a loan for 13 percent, says Howard S.
Dvorkin, president of Consolidated
Credit Counseling Services, a nonprofit debt counseling service. That means
you might pay up to $5,000 more for your car. And when you're buying a house,
the difference between a good score and a poor score "can translate into
well over $100,000 over the life of a mortgage," Dvorkin says.
Three steps to better credit
The good news is that a bad credit score -- or even a mediocre one -- doesn't
have to be permanent. Credit scores change as your credit activity does. Armed
with the right information, you can take steps now to improve it.
The first step is to make sure that your credit report is accurate. Your score
is only as good as the information in your report, which simply lists your
history of paying off loans and bills. Order a report from all three bureaus
(they don't always have the same information) or get a consolidated report
through Myvesta.org, a nonprofit debt counseling agency.
The second step is to understand how your score is derived so you'll know how to
improve it. Your Equifax-FICO score report includes the top four reasons your
score isn't higher, listed in order of importance. You may find out the biggest
reason your score isn't higher is because the outstanding balances on your
credit cards are too high. You'll know, then, to start paying down those
balances. Just about everyone's credit scores will improve if they pay off
existing balances and make payments on time.
Online access only
You can get your FICO score and credit report from Equifax for $12.95. But you
have to order online, which can be a time-consuming and baffling experience.
Heavy traffic to the Equifax site may delay delivery of your score.
What's more, verifying your identity can be a hassle. That's not necessarily bad
news. Equifax is serious about protecting your credit information. But you must
answer questions to which purportedly only you would know the answers. This is
meant to distinguish you from someone who stole your wallet with your ID,
Cummins says, but don't be surprised if they seem like "trick"
questions. For instance, you may be expected to answer "none of the
above" to multiple-choice questions about a loan you never took out.
If the system suspects you may be fraudulent, you must phone an Equifax
representative. And you may have to fax the company two or three pieces of
identification verifying your Social Security number and address. Like Equifax,
the Experian
score can only be purchased with your report online for $12.95. The TransUnion
score (included free whenever you buy your TransUnion credit report, which
will cost up to $9.00 depending where you live) may be purchased online, by
mail, or, in some cases, by phone.
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