Check Credit Score

As consumers, we all rely on credit for so many necessary things in our lives, from buying an automobile, home or acquiring a student loan. Something so simple as a 3 digit number, your credit score, can decide whether or not you will qualify to do these things and perhaps how much it might cost. So why should I check my credit score?

Can a few digits really decide whether you can purchase a home or vehicle? If you know anything about credit you know that your credit report includes your past history of how you have paid your bills, how much or little open credit you have, and almost anything else that could affect your worth to potential lenders. Your credit score is basically a combination of all these factors filtered down to a 3 digit number. Using the credit score, lenders can prognosticate with some confidence how likely the borrower is to pay back a loan and live up to their financial obligations.

This very important number, which determines how much you spend for credit, insurance and other necessities of your life, at one time was not displayed to the public. Just recently, only banks and other businesses that used the credit score were able to access it. Fair Isaac and Company, which created the score, came to the conclusion consumers would only be confused by the score because there was nothing to tell them what it meant or what potential lenders might be looking for.

In 2001, however, this changed due to pressure from the United States Congress, business and consumer action groups. These days you can see your credit score -- for a fee – from credit monitoring services and credit reporting agencies.

Ultimately, to help us understand the number and to that end know how to improve it, we will need to understand how it's calculated.


What Goes Into A Credit Score and Why Should I Check My Credit Score?

Your credit score is created by weighing different criteria in your credit report.

A credit score is calculated much like a grade mark in school. Imagine how an educator calculates grades by combining scores from exams, homework, attendance and essentially anything else they would like to use, weighing each part according to iwhat they feel is important to determine a final, score. It is essentially the same idea for a credit score. Instead of using the scores from tests and papers, it utilizes the contents in your credit report.

The score ranges from 300 to 850. Even though the specific forumla for coming up with the score is not known, here is an approximate description of how it's determined:

This data is used to compare the credit status of other consumers with similar histories. Some other lenders have their own scoring systems, which might include data such as your yearly income or how long you have been with the same employer.

After it is all said and done, how important is your credit score and what does it mean for your interest rates?


What Can My Credit Score Affect?

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Your credit score can have a direct correlation to interest rates and ultimately how much a monthly mortgage or monthly automobile payment will be. If not watched closely you could end of paying thousands more over the life of the loan if you are looking at a low credit score. Once your credit score gets lower, you looked at more as a credit risk to lenders. They will surely attach a higher interest rate to your monthly installment, and your monthly payments will increase significantly. On the flip side a higher score could lower that interest rate. Look at this chart above, this shows the correlation between interest rates and credit scores.

This chart below illustrates how interest rates for an automobile loan can change based on your credit score:

Your credit score has a large impact, however understand that there are other factors that go into the interest rate you receive on a loan other than your credit score. These could include the kind of property you are using the loan to purchase, how much equity is going into it, the amount the lender pays to create the loan and so forth.

As well as lenders and banks, there are others such as merchants, employers, landlords and insurance companies looking at your credit score. Out of all of the ones just listed, insurance rates are the most controversial. It is logical to think that your credit history and your driving record don't have much in common. Insurers, however, feel that credit scores help them determine how likely a person is to file a claim. The way they see it is the lower the score, the higher the probability of filing a claim. They do not use the same scoring system that lenders use. They utilize different system for their scoring and call it an insurance score.

Insurance companies use of credit histories to come up with rates is being watched closely and in many places scrutinized. Several states are enacting laws restricting this type of practice. In select states, insurers can not make unilateral decisions based on credit alone. In other states, if an insurer makes a decision that affects your policy in a negative fashion it must disclose to your the reasons behind the ruling.

On a similar note another practice that upsets consumers is concerning universal default and credit card company policies. We have looked at the way your credit score can decide your interest rate, credit cards on the flip side can change at will. Regardless if you pay your credit card bill on time, if you default on a completely different loan, your rates on your credit card debt can jump drastically.

So what have we learned here? Credit scores are greatly important. Trying to improve and check my credit score could be a good and money saving idea.