A credit score is used by lenders to determine your creditworthiness -- how likely you are to be able to pay back a loan. Your credit score affects the interest rate that lenders offer you on loans. The most widely used credit scoring system was developed by the Fair Isaac Corporation, now called FICO, in 1989. The FICO system, and other credit scoring systems, award or subtract points based on factors such as your payment history and the amounts you owe.
Determining Credit Scores
Credit scores generally range from 300 to 850. Credit agencies determine your credit score by looking at different parts of your credit. According to the Federal Citizen Information Center, about 35 percent of the FICO score is based on your payment history -- how often you have paid on time. Around 30 percent of your score is based on what you owe; if you are often at, or close to, your credit limit, this lowers your score. Fifteen percent of your score is based on the length of your credit history, 10 percent depends on how much of your credit is recent, and 10 percent is based on other factors, such as whether you have different types of credit, such as a mix of home and car loans, credit cards, and store cards.
Effect on Mortgage Rates
Although credit scores above 700 or 725 are considered good, most lenders reserve the best mortgage loans, and the lowest interest rates, for scores above 770. People who have scores below 660 may only qualify for high interest or high fee subprime loans. The interest rates a lender charges you on a mortgage loan can be affected by even small differences in your credit score, which can add up to many thousands of dollars over the life of a mortgage loan.
Effect on Credit Cards and Other Expenses
A variable loan is any loan where the interest rate is not fixed, and changes over the life of the loan, and the interest rate that lenders charge variable loans such as credit cards can also be affected by your credit score. This is because lenders see people with low credit scores as a higher risk of defaulting on their loans or missing payments. Lenders also look at your credit score when deciding whether to raise your credit limit. Landlords may also look at applicants' credit scores when deciding to rent property or when deciding how much deposit to charge renters. You scores may also determine how much deposit you will have to pay for utilities and telephone service.
Raise Your Score
Raising your credit score is the best way to qualify for lower interest rates on loans, and to lower the interest on your current loans. The best way to raise your credit score is to make sure you pay all your loans and credit cards on time, every time, suggests Pat Curry at Bankrate.com. If you have missed a payment or gotten behind, you should concentrate on getting current and staying current. Liz Pulliam Weston at MSN Money suggests that to get your score over 740, you need to have a major bank credit card -- such as Visa or MasterCard. You should use the card regularly, but pay off the balance each month.
- Bankrate.com: Tips for Boosting your Credit Score
- myFICO: Improving Your FICO Credit Score
- Federal Citizen Information Center: Your Credit Scores
- MSN Money: How to Raise Your Credit Score and Improve Interest Rates
- Board of Governors of the Federal Reserve System: 5 Tips - Improving Your Credit Score
- Federal Trade Commission: Facts for Consumers
- Jupiterimages/Brand X Pictures/Getty Images