by Dana Coyle

Created on: January 13, 2009

Today we are increasingly rated and judged on our credit scores. They are a factor in decisions about personal finance, insurance, employment and even security clearances. And higher scores can save us money.

The most commonly used score in the U.S. is the FICO score, based on the formula developed by the Fair Isaac Corporation. The FICO score ranges from 300 to 850. The higher your score, the better your chances for loan approval and lower interest rates.

All lenders have their own qualification requirements, however, a score of 700+ is generally considered good and usually provides more financial options to the consumer.

LOAN QUALIFICATION

For major purchases such as home loans, mortgage refinances and automobiles, credit scores are one of the main items used to determine qualification. Some companies won't even consider moving forward in the application process if the scores do not meet their minimums.

BETTER INTEREST RATES

When credit scores are high enough to qualify for the loan, they also typically play a role in the rate of interest that the loan will be financed at. According to Fair Isaacs, a FICO score of 675 could get a rate of 5.087% on a 30-year fixed mortgage while a score of 760 could qualify for a 4.474% rate.

The higher score would save $111 each month, for a saving of $1300 per year. That adds up to almost $40,000 saved over the life of the loan.

OPENING ACCOUNTS

Most banks check your credit before agreeing to open a checking and/or savings account for you. Additionally, most utility companies, including cell phone service providers, will check consumer credit before granting service.

RENTING A HOME OR APARTMENT

Landlords and apartment management companies generally include a credit check in their application process. Having collections for past rentals not only lowers credit scores, it often sends a red flag to the company about the prospective tenant.

INSURANCE RATES

Did you know that your car insurance rate is based on several factors, including your credit? Most insurance companies have their own scoring model; again, the better your credit score, the better insurance rate you'll get from your provider.

EMPLOYMENT

It is becoming routine for employers to include a credit check along with their screening of potential employees. Negative items such as tax liens and judgments not only impact credit scores, they are also scrutinized by prospective employers. Additionally, companies that issue security clearances conduct periodic credit checks for employees to continue to qualify for their level of clearance.

DIFFERENT SCORES

It is important to note that not all credit scores are equal. There are several varieties of scoring formulas on the market. Because most lenders and financial companies use the FICO score, consumers should be sure they also obtain a FICO score when checking their own credit to have a fair comparison to what their lender will see. The FICO websiteis a safe, secure place to obtain all three FICO scores with credit reports.

Building good credit scores takes time. The most important thing to do is to pay all bills on time and keep credit card balances under 30% of the credit limit. Monitoring your credit reports regularly will assure that all of your information is accurate to help your scores grow.

Yes, credit scores play a major part in our lives today. The good news is that with knowledge, we can get better credit scores and enjoy more financial options in our lives.

Learn more about this author, Dana Coyle.
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