How To Read Credit Scores

How to Read Credit Scores

SCENARIO #1: You went online and applied for a loan. Sixty seconds later, you realize you've been approved.

SCENARIO #2: You applied for a car loan and got pre-qualified.

SCENARIO #3: You and your neighbor applied for the same loan, but his loan rates are different from yours.

And all this without anyone even asking you how much money you make. How in the world did they know whether to approve you or not?

The answer lies in your credit score.

Credit scoring is a mathematical algorithm used by credit reporting agencies like Equifax, Experian, and Trans Union, in order to come up with a three-digit number, based on information found in your credit report as compared to information found in tens of millions of other people's credit reports. Since your credit report contains factors that are predictive of future credit performance, the resulting number is a highly accurate prediction of how likely you are going to pay your bills.

Knowing how to read credit scores is important since these scores are used extensively by lenders when reviewing your application for a car loan, mortgage, credit card, or auto insurance. The rate you will receive from these credits will be directly related to your credit score.

Thus, if you have a high credit score, the better your application will look to your lenders. On the other hand, if your credit score is below average, lenders will give you higher loan rates.

What's a Good Score?

How to read credit scores starts with knowing what are the scoring categories used. Fair Isaac Corp., a California-based company, is the developer of the most popular credit scoring system used by many of the country's credit reporting agencies. Its score is called the FICO score and it runs in a scale of 300 to 850. In order to get the most favorable interest rates, your score must be 720 or higher.

However, it should be noted that there is more than one credit score available. There are three major credit reporting agencies and several smaller independent companies that provide their own credit scores using their own credit scoring system, not just the FICO scoring system. This means that your credit scores may vary from credit reporting agency to another.

Knowing how to read credit scores comes in handy whenever you are faced with inconsistent credit scores. When you know how to read credit scores, you know what factors are involved in order to calculate the score.

Another reason why it is important to know how to read credit scores is that this three-digit number will determine if you will get credit at all. Ed Ojdana, president of the Experian Consumer Direct, part of Experian, the largest of the three major credit reporting agencies, says that your credit score will also determine the interest rate on your credit.