Why it pays to know your credit score

Anyone with a credit card, car loan, student loan, or mortgage has a credit score. What your score is and how you use credit each day should be as important to you as it is to many others who know your score and use it for their own purposes.

Your credit score provides an indication of how likely you are to make payments on time and whether you make responsible use of any new credit you obtain.

Lenders use your score to determine if they will approve your loan and the interest rate you will pay. Car insurance companies look at your score to decide if they will insure you and how much they will charge for the policy. Mobile phone companies use it to approve an application for a new account. The owners use it to decide if they will rent you an apartment.

For these reasons, if you have a low credit score, you should know this before others find out. And you should know how to take steps to improve it.

The most commonly used credit score is your FICO score, developed by Fair Isaac Corp., based in San Jose, California. Its three-digit score ranges from 300 to 850.

Another, VantageScore, was developed by the major credit reporting agencies, Experian, Equifax, and TransUnion, and also ranges from 300 to 850. There are other similar credit scores, but the FICO score is used. in more than 90 percent of lending decisions. in the US, lenders buy more than 27 million FICO scores every day.

While not all financial institutions universally use a single credit score, extensive data indicate that people with FICO scores below 670 to 700 have a significantly higher probability of making late payments.

Having a higher FICO score can help you save money when you get a new loan because lenders give their best rates to borrowers with higher scores.

Here’s an example of FICO: Compare two people, one with a credit score of 620 and another with a score of 760. Each is asking for $ 280,000 for a 30-year fixed-rate mortgage. The borrower with a score of 620 would qualify for a mortgage with an interest rate of about 5.08 percent, but the person with a score of 720 would get a rate of about 3.49 percent.

In this scenario, the borrower with the FICO score of 720 would pay $ 261 less per month and save $ 93,960 over the life of the loan.

Don’t know your score? You can get it for free at sites like Credit Karma, and you can get your credit report from each of the top three credit bureaus for free once a year at annualcreditreport.com. The first step to improving your score is to review the report because if you have incorrect negative information, it may lower your credit score.

Don’t be surprised to see different information in your report from each of the three credit bureaus. If you want a complete picture of all credit information, you should get your reports from all three branches.

If you find incorrect information that you think should be removed, file a dispute with the credit bureau. He then has the burden of asking the creditor to remove it or to prove it correct.

In a follow-up article, I’ll write about the key things that make up your credit score and what you can do to improve it.