9.11.2009

Explaining credit scoring

Credit Scores: What You Need to Know Now

Excerpt:

Credit scores have been getting a lot of attention lately, as lenders tighten credit standards and contend with new legislation that has, among other things, reined in how credit-card issuers can raise rates.

Meanwhile, several firms, preying on our insecurities, are pushing credit scores and credit-score-tracking services for a monthly fee.

For all the attention they generate, though, credit scores are largely misunderstood. For instance, your precise score matters only when you're in need of new debt, like a home, auto or education loan or a new credit card, which should be a fairly rare occurrence.

You don't have just one score, but many. Your FICO score, the one developed by Fair Isaac Corp. that runs from a low of 300 to a high of 850, will vary depending on which credit bureau is reporting it and the kind of lender that requested it.


Comment: Why is it important? If you never intend to borrow it probably is not. But it you have a mortgage loan, auto loan, or any other kind of loan in your future; improving your score will enable you to borrow at a lower interest rate! Article has a helpful graph!

2 comments:

  1. I like to explain credit scores this way; credit scores primarily measure how reliably you pay interest on loans, not how good a credit risk you might be. :^)

    OK, it's cynical, but largely true. Credit scores' correlation with actual creditworthiness is purely incidental.

    Credit scores are, however, also often used for employment decisions--and I tend to agree with this. Do you want someone who will listen when someone says "hey, I can help you pay your credit card bill if you give me this information"?

    ReplyDelete
  2. On "purely incidental". I agree that that credit scores are not the "complete picture". Doesn't reflect Assets, or Income!

    ReplyDelete

Any anonymous comments with links will be rejected. Please do not comment off-topic