Credit Score
How credit score been derive and how it affect you
A credit score is a three-digit number based on a borrower's bill-paying history and debt profile and statistical information about other borrowers that lenders use to determine the likelihood of certain credit behaviors, including whether you will pay on time.
The company behind the credit-score phenomenon, Fair Isaac, developed its scoring system in 1989 to give lenders a shortcut for judging applicants’ credit-worthiness. The three major credit bureaus (Equifax, Experian, and TransUnion) use the system to calculate a so-called FICO score based on the data they collect about you from banks and credit-card companies, such as payment histories and debt, and from public records, such as bankruptcy filings and tax liens. The fico calculation involves using 22 pieces of data and that the final figure, the credit score range from 300 to 850. This credit score hinges on mathematical models that forecast behavior.
The goal credit score is to quickly separates the good performers from bad. The median U.S. credit score is about 720. Most consumers fall into one of the following five credit score range: above 800; 750 to 799; 700 to 749; 650 to 699; and 600 to 649, with more than a quarter in the 750-to-799 range.
Experts say that the credit score from the calculation has proven successful in predicting who is likely to pay bills on time and that it is an efficient way to bypass reams of credit report data. They also say that the credit score offer consumers rapid loan approvals--these days approval for a credit card can be granted in a matter of seconds--lenders must rely on a simple scoring system.
How the credit score range can affect you
The way that credit scores influence lenders and affect consumers’ pocketbooks becomes evident when you apply for a mortgage. For a $150,000, 30-year fixed-rate mortgage, people with in the credit score range of 720 and above would be eligible for a bank’s most generous loan: an interest rate of 5.55 percent (as of early June 2005) and a monthly payment of $856. For a credit score range between 675 and 699, the rate jumps to 6.21 percent, or $920 a month. And those with a score of 620 to 674 would pay 7.36 percent, or $1,034 a month. Over the life of the loan, the people with the best credit scores may pay roughly $138,000 less than those with the worst. Similar sliding scales are used to set rates on credit cards and auto loans.
Like lenders, auto and home insurers are increasingly relying on credit score. A 2004 analysis by the Missouri Department of Insurance found that 9 of the state’s top 10 homeowners insurance companies use credit checks to determine eligibility and rates. In Texas, where 54 percent of property underwriters and 82 percent of auto insurers rely on credit-based scores, rates on similar policies differed by as much as 400 percent because of credit score variations, according to a 2004 survey by the state’s insurance department.
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