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Understanding Your Credit
Checking your credit report once a year can be as important to your financial well-being as getting an annual check-up is to your physical health. Your credit report can tell you if there are mistakes that could make it more difficult or more expensive to get a loan. It can also tell you who else has been checking your credit. And if there are active accounts you didn’t open, it can clue you in to identity theft. Then there is the financial equivalent of your cholesterol level: your credit score, a number meant to tell lenders at a glance how much of a risk you are. Before you go in for your annual financial check-up, here is a look at the basics of credit reports and scores:
Know the score: For many lenders, creditworthiness is boiled down to one thing - a credit score. The number, which falls between 300 and 850, tells lenders how likely you are to repay a loan. About 60 percent of Americans have good credit, defined by a score of 690 or higher. Twenty percent have poor credit, below 620.
How it can cost you: A low score often means you pay a higher interest rate because the bank is taking on more risk. For example. if you are shopping for a mortgage, that can cost hundreds of dollars a month. If you have poor credit, and were to take out a $250,000 home loan at 8%, you would pay about $1,835 per month. The same loan amount, for someone with excellent credit, would cost about $1,420 a month at 5.5%. This is a difference of $415 per month, and $149,400 over the 30-year term.
Source: Fair, Isaac & Co.
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