Your credit score is a number generated by a mathematical formula. It is based on information in your credit report and compared to information on millions of other people. The resulting number accurately predicts how likely you are to pay your bills. Credit scores are used extensively by lenders and they drive the interest rate you are offered. The higher your credit score, the better you look to lenders and the more advantageous your interest rate will be. People with the highest scores get the lowest interest rates.
Lenders use many different credit-scoring models to determine if you are creditworthy, and. Different models can produce different scores. FICO is one of the most popular scoring methods used by lenders. The scale applied by the FICO method runs from 300 to 850. The majority of people fall between 600 and 800. A score of 720 or higher will get you the most favorable interest rates on a mortgage, according to data from Fair Isaac Corp., a California-based company that developed the first credit scoring method as well as the FICO score.
At this time, each of the major credit bureaus uses their own version of the FICO method - Equifax uses the BEACON score, Experian has the Experian/Fair Isaac Risk Model and TransUnion uses the EMPIRICA score. The three methods can come up with different scores.
Presently, a new credit-scoring model is under development with VantageScore, Equifax, Experian and TransUnion collaborating on its development. It is intended to use the same algorithm to compute the score.
The difference in the interest rates offered to a person with a score of 520 and a person with a 720 score is 4.36 percentage points, according to Fair Isaac's Web site. On a $100,000, 30-year mortgage, that difference would cost the borrower more than $110,325 extra in interest charges, according to Bankrate.com's mortgage calculator. The difference in the monthly payment would be approximately $307.
Credit scores are looked at by all lenders, including credit card issuers who might decide whether to increase your credit line or increase your interest rate based on your credit score. Consumers can go online with any of the major credit bureaus and order their credit score for a minimal fee. It is a good idea for consumers to review their credit score periodically, which also enables them to assess any fraudulent activity involving their personal information.