Understanding Your Credit Score:
A credit score is a grade that is based on the financial trustworthiness of a person. It is vital in determining an individual’s credit worthiness and plays a key role in getting loans, mortgage approvals, insurance and more.
What does your credit score mean?
The FICO (Fair Isaac Corporation) score is the most commonly used method of computing your Credit Score. Their rating systems/algorithms are used by over 90% of lending institutions as well as most insurance companies and employment investigation companies. FICO has created an independent rating system for each of the three national credit bureaus. These rating systems are meant to develop a snapshot of the risk you currently represent to whichever company is purchasing the information. Several parameters in your credit file, including length of credit history, number of open accounts, loans, mortgages, public records, and others are formulated to produce a three-digit score between about 300 and 850. There are other scores used by lenders and insurance companies (some of which are developed by FICO) such as Application and Behavior scores. These other scores take different information into account. Usually a company will use a combination of your credit score with other factors when determining what your overall risk is to them. All companies purchasing credit score information have the same objective which is to make an assessment of the level of risk they will have when doing business with you. Regardless of whether the score was generated by FICO or a system based on FICO parameters, they all yield an industry standard three-digit score. This score places the borrower in one of three main categories. (Ok, so the third one isn’t a real category, but it probably should be…we named it ourselves.) The three credit score categories are prime, sub-prime, and toasted.
Prime – If your credit score is above 680, you are considered a “prime borrower” and should have no problem getting a good interest rate on your home loan, car loan, or credit card. Additionally, this score will increase your chances for getting low-cost insurance. It will also look good should a potential employer use it as part of their overall candidate assessment.
Sub-Prime – If your credit score is below 680, you are “sub prime”, and will likely pay a much higher interest rate on your loan. Getting a loan will be somewhat more difficult although there are lenders who will generally work with sub-prime borrowers. Additionally, some insurance companies may not insure you and some employers may think twice about hiring you.
Toasted – Below 560 is the “your toast” score. At least that is how most lenders and credit issuers perceive it. You can still get a credit card but you will likely be hit with a security deposit or high acquisition fee. In addition to that your interest rate will likely be at the maximum allowed by law. You can forget about most home loans and the majority of new car loans at this score. Below 560 is no place to be. You will pay much, much more because of higher interest and unnecessary fees. Your insurance rates will likely be significantly higher. A very low score can also prevent you from getting a job with many companies. If you’re in this category we may be able to help improve your overall score through our self-help credit repair program.
More About Credit Scores
