Financial Tip of the Week from the Iowa Bankers Association:
A credit score is a number that helps lenders and others predict how likely you are to make your credit payments on time. Each score is based on the information in your credit report. The most commonly-used credit scoring system is the FICO® score, developed by Fair Isaac Corporation. FICO scores range from 300-850, with most people scoring in the 600-700 range. FICO scores above 700 are very good and are generally a sign of financial health. FICO scores below 600 indicate higher risk.
Why Your Credit Score is Important
Credit scores affect whether you can get credit and what you pay for credit cards, auto loans, mortgages and other kinds of credit. For most kinds of credit scores, higher scores mean you are more likely to be approved and pay a lower interest rate on new credit. Want to rent an apartment? Without good scores, your apartment application may be turned down by the landlord. Your scores also may determine how big a deposit you will have to pay for telephone, electricity or natural gas service.
Lenders look at your scores all the time. They look at your scores when deciding whether to change your interest rate or credit limit on a credit card, or whether to send you an offer through the mail. Having good credit scores can save you money in lower interest rates. Consider the following example:
A couple is buying their first house. They want a 30-year mortgage and their FICO credit score is 720. They could qualify for a mortgage with an interest rate up to three percentage points lower than a couple with a FICO score of 580. On a $100,000 mortgage loan, that difference in interest rate accounts for as much as $2,400 a year, adding up to $72,000 over the loan's 30-year life.
What You Can Do
Wondering how you can take steps to improve your credit score? Here are a few steps to get you started: