Consumer Friendly Credit Scoring
Credit scoring is getting smarter and friendlier for most consumers to use. Most people are aware of how widely used credit scores are in the financial industry. This three-digit number is the result of a complicated mathematical algorithm that is designed to help banks, credit card providers, auto loan companies and others decide how good a credit risk you are. What matters most to consumers is that it can make a huge difference in the interest rates you are be offered. More and more, it can even affect the insurance rates or jobs available to you.
You credit score is determined by comparing your credit history and payment patterns with thousands of other borrowers. The scores usually fall in the range of 500 to 850. The higher your number, the better your credit is. A person who has a FICO score of 720 or more will usually pay significantly less in interest on a mortgage or other loan than someone whose score is below 560.
Despite all of the talk about credit scores, you may not be sure of which activities will help your credit score and which ones will hurt it. Lucky for you, if you can access the internet, you can pull up a credit score simulator and play with the variables to see how they will affect your credit score. For example, you can find out how high you can boost your score if you pay off all your current credit card balances, or if you can raise your score to the desired level if you pay off just one.
The mortgage industry has used your credit scores for years to help speed up their lending process. Credit scores are also widely used for car loans, and they are the force behind online “instant” credit card approvals. They have even become standard in the insurance industry for setting car insurance rates. Employers can now use credit scores to screen applicants, particularly those applying for money-handling positions. Landlords even access them when looking at potential tenants in order to see who is most likely to pay their rent on time.
One current trend for using credit scores is customized credit scoring. This is the tendency of lending institutions to use their own underwriting criteria on top of the basic credit score. The result may be that the same score will mean different things to different lenders. For example, a score of 680 might be seen as average to one lender, but as very good to another. The type of loan or other factors determined by the individual lender can lead to the same score being evaluated in a different way. The benefit to you is that if you don’t like what you hear from one lender or credit card company, you may be able to find a better response elsewhere.
Of course, every system will have its positives as well as its negatives. If you already have good credit, the system can simply make things easier for you. If you have poor credit, the new options for understanding and improving your credit score, along with the new ways of interpreting these scores, may allow you more opportunities than you had anticipated. It’s worth looking into!