What is a credit score? A credit score is simply a number based on information in a consumer’s credit report. Your score is determined by reviewing your salary, employment history, history of late payments, non-payment of loans, current level of debt, length of credit history, number of bad checks written, history of applying for credit, etc. Credit scores do not reflect personal characteristics such as age and gender.
A credit score is used by the three nationwide credit reporting agencies to indicate the likelihood that you will repay a loan on time and in full, or your credit risk factor. The higher your score, the more reliable you are considered to be.
Although each credit agency uses its own method of calculating and applying credit scores, all three agencies share the same standard. A consumer with a high score is considered an excellent risk, and thus has an excellent chance of obtaining a quality loan at the lowest interest rates. A consumer with a low score is typically charged a relatively high “subprime” loan rate. And this is where the money saving comes in.
So, why should you care what your credit score is? Because a consumer with a high score can save thousands of dollars in interest payments on loans. A consumer with the high credit score who wants a 30-year, fixed-rate, $150,000 mortgage, may be offered a loan with an interest rate of 5.42 percent and monthly payments of $844. A low-scoring consumer may be offered a rate of 7.0 percent for the same mortgage, with monthly payments of $998. Over just one year, the consumer with the low score will pay $1,848 more than the consumer with the high score. For a 30 year mortgage, that’s a difference of $55,400.
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Under the federal Equal Credit Opportunity Act, a lender that uses national credit bureau data must give consideration to credit information that is not included in traditional national credit bureau files. That means that if you have a good payment history for such debts as rent, child support, child care, payday loans, utility and/or cable TV bills, you can request a “Bill Paying Score” from PRBC, a national credit reporting agency which specializes in collecting and evaluating “nontraditional” credit history information. Adding in this score can increase your traditional score, thus making you eligible for better loan and interest rates. For information on obtaining your Bill Paying Score, call 1-877-PRBC-123 (1-877-772-2123), or visit the website at www.prbc.com.
Consumers can control their credit scores by paying their bills consistently and on time, not maxing out their credit cards or other revolving credit, paying off debt rather than just moving it around, and not opening several new accounts at the same time. It is also important to avoid bankruptcies, foreclosures and judgments. These practices will cause a negative impact on a consumer’s credit score for years, possibly through life.
In addition, consumers should check their credit scores annually to make sure they accurately reflect the information in their credit report. It is estimated that less than one-third of American consumers had obtained their credit scores in the past year. (Far more have requested their credit report, which can now be obtained free once a year.) Although consumers who apply for a mortgage loan can obtain their credit scores free, others must pay a nominal fee. Your credit scores can be ordered directly from FairIsaac (www.myFICO.com), or from any of the following three nationwide Credit Reporting Agencies:
Equifax, PO Box 105851
Atlanta GA 30348
1-800-685-111
www.equifax.com
Experian, PO Box 2002
Allen TX 75013
1-866-200-6020
www.experian.com
TransUnion, PO Box 2000
Chester PA 19022
1-800-888-4213
www.transunion.com
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