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Most people have heard the old adage that the higher your credit score the better. We all know that a good credit score means lower rates when you want to obtain a loan on a car, mortgage and other large ticket item. The truth is that financial institutions use ranges to determine interest rates on a loan.
For instance, in some financial institutions, a credit score above 730 will receive the lowest interest rate the company charges for a particular type of loan. In other words, someone with a credit score of 820 and someone else with a score of 740 will both receive the same interest rate for the same item. Thus, check your credit score and make sure it is greater than 730 and if it is be sure to keep it there!
The general rule of thumb is the higher your credit score the greater the hit it takes. For example, someone with a great credit score of 780 who files for bankruptcy may see their credit drop over 200 points. Someone with a credit score of 580, which isn’t such a good score, may see their score drop by only 40-60 points. So the person with excellent credit, what we call A+ in the financial world, will fall out of that A+ category but the person with the 580 score will still have a below average score. Who said life is fair!
Generally you would think that the lower score of 100 has the worse credit. That is not true. In this scenario the person with the 400 score has the worse credit. Of course the one with 700 has very good credit. Someone with a 100 score, which is the lowest score the bureaus assign, means that the person has no credit history. This means they are a child or perhaps a new immigrant to the United States. A 400 score means someone has actually ruined their credit and will have numerous derogatory indicators in their credit report.
Credit reports from the 3 credit bureaus (Experian, TransUnion, Equifax ) generally look at 5 financial areas. Each of these areas make up varying weights or percentages of the score. The largest and thus the most important area is payment history which makes up 35% of the score. Amounts owed (one’s outstanding debt) makes up 30% of the score. The other 3 areas are length of credit history (15%), new credit (10%) and types of credit used (10%). To understand how each of these impact your credit score and what you can do to improve and protect your credit score, consult a financial advisor at your credit union.