Consumer Law

How A Credit Score Affects You

By M. Stan Herring

Investopedia.com has posted an article that discusses exactly what your credit score means. A credit score is one of the most important numbers attached to a person's life and can affect everything. For example, landlords are more likely to rent to tenants with good credit scores, companies hire workers whose credit scores are better because it means they're dependable, and it determines if you can be approved for a loan for a major purchase like a house or car.

The recession has forced lenders to be more particular about who they approve for loans so that their risk is minimized. Credit scores range from 330-830. 680 was considered a "good" credit score back in 2008, but currently a "good" credit score is 720 and up. The average score in the US, according to Porcshe Moran, author of the article, is 698. This means that most Americans are paying more for large purchases because of their credit score.

Lenders evaluate FICO scores based on a tiered system that divides credit scores into five ranges. Scores below 620 are often considered subprime, and borrowers in this range will either be denied loans or be offered higher interest rates and lower loan limits. For example, a non-profit state loan agency set 770 or higher as the top tier of FICO scores. Borrowers in this range received the lowest interest rates. In previous years, the same agency ranked 680 in the lowest tier in which borrowers were subject to interest rates that were 4.15% higher than those with scores in the top tier.

Borrowers with a FICO score of 689 were placed in the lowest tier. A score only one point higher, 690, was enough to be bumped up to the next tier and amounted to an interest rate that was 2.5% lower. These same dramatic jumps in interest rates can be seen in other industries such as home mortgages and car loans. Borrowers are encouraged to shop around for loans because each lender has their own "break point" between tiers. If you can find a lender that places your score in a higher tier, it could result in significant savings over the term of your loan. Another option is to find a co-signer with a higher credit score who would be able to get you placed in a higher tier.

It's possible that lenders will lower the definition of the average credit score as the economy improves. Until then, it's a good idea for consumers in the lower tiers of credit scores to hold off on applying for loans and try to improve their score by paying bills on time and checking their credit reports. If you must apply for a loan, be sure to shop around for the best rates because lenders can, and will, base the rate they give you on your credit score.

If you have had credit issues and have questions or concerns, feel free to contact us through our website or by calling 205-879-2447.

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Full post as published by Alabama Consumer Blog on December 06, 2010 (boomark / email).