You Need to Know Your Credit Score

It's Important!

Bad credit can disrupt your life. That's why, in addition to paying your bills on time, it's important to check the accuracy of your credit reports several months before applying for a mortgage or car loan. And these days, you also can find out your credit scores - the numbers lenders use to decide how likely you are to repay a loan.

Why
do you need to know your scores? Because the lower your scores, the higher risk you are to a lender and the less likely you are to get the best rates on loans. Checking your score with Equifax, Experian or Transunion (the 3 major credit reporting companies) before you apply for a loan can save you money if you catch a mistake and correct it. When you are buying a home, the difference between good scores and poor ones can translate into well over $100,000 over the life of a mortgage according to Howard S. Dvorkin, president of Consolidated Credit Counseling Services, a nonprofit debt-counseling service.

Most lenders initially use the Experian score system known as FICO, developed by Fair, Issac and Co. Serveral factors go into your score, including bankruptcies, how many years you've made. Most consumers' FICO scores fall between 300 and 850. Sixty percent score above 700; 27% score between 600 and 699, and 12% score between 500 and 599. The way lenders view score varies from one institution to the next. But generally speaking, this is a rough guide to how your score may be perceived by a mortgage lender:

700 and above - EXCELLENT -
you will get the best rates

680-699 - GOOD - lenders will be favorable, but you should make moves to improve your score further. Expect to qualify for rates 1/2 to 1% above Excellent ratings.

620-679 - AVERAGE - the lower your score in this bracket, the more collateral lenders will require and the higher rates you may get. Expect to qualify for rates 1-2% higher that Excellent. Commercial lenders will not accept your loan request below 680.

580-619 - SUBPRIME - scores in this range are often referred to as "A- credit". You will have to put more down and pay far higher rates than most borrowers. If you score 590, for example, and want to but a car, any loan you get will carry a high interest rate. If the average rate on a 5-year car loan is 8% at the time you apply, expect to get a car loan for 11-13%.

BELOW 580 - Often referred to as "B/C-credit," you can expect to only qualify for adjustable rate mortgages (ARMs). Consumers in this range will pay above 11% for mortgages and will need down payments of at least 20% to purchase homes.

Moves to make a mediocre credit score of even a bad one better are not difficult. You can take steps to improve any credit score. The 1st step is to make sure that your credit history is accurate. Your scores are only as good as the information reported by your creditors to the credit bureaus. Each credit bureau may not have the same information. The 2nd step is to use the information on your credit history to improve your scores. Each credit bureau will list the top 4 reasons for why your credit score is where it is. You may find the biggest reason your scores are low is that the outstanding balances on your credit cards are too high compared to the total credit limits. Any credit score will improve if you pay off balances and pay on time.

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