Explaining credit scoring
Credit Scores: What You Need to Know Now
Excerpt:
Credit scores have been getting a lot of attention lately, as lenders tighten credit standards and contend with new legislation that has, among other things, reined in how credit-card issuers can raise rates.
Meanwhile, several firms, preying on our insecurities, are pushing credit scores and credit-score-tracking services for a monthly fee.
For all the attention they generate, though, credit scores are largely misunderstood. For instance, your precise score matters only when you're in need of new debt, like a home, auto or education loan or a new credit card, which should be a fairly rare occurrence.
You don't have just one score, but many. Your FICO score, the one developed by Fair Isaac Corp. that runs from a low of 300 to a high of 850, will vary depending on which credit bureau is reporting it and the kind of lender that requested it.
Comment: Why is it important? If you never intend to borrow it probably is not. But it you have a mortgage loan, auto loan, or any other kind of loan in your future; improving your score will enable you to borrow at a lower interest rate! Article has a helpful graph!
I like to explain credit scores this way; credit scores primarily measure how reliably you pay interest on loans, not how good a credit risk you might be. :^)
ReplyDeleteOK, it's cynical, but largely true. Credit scores' correlation with actual creditworthiness is purely incidental.
Credit scores are, however, also often used for employment decisions--and I tend to agree with this. Do you want someone who will listen when someone says "hey, I can help you pay your credit card bill if you give me this information"?
On "purely incidental". I agree that that credit scores are not the "complete picture". Doesn't reflect Assets, or Income!
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