In What Bucket Do Creditors Put Your Credit Score?
Credit scores. Do you know yours?
Turn around these days and there is some offer to see your credit score. It could be from your bank where you have your checking and savings accounts, a company that issued one of your credit cards, or a website that offers free credit scores. Wherever you get it, you receive a number that represents your credit score.
Your Credit Score is Important
FICO scores range between 300 and 850. According to the Fair Isaac Co., the creator of the FICO score, the average U.S. credit score is 704, an all-time high, as of Sept. 2018.
Your individual score is important, for a number of reasons:
- Lenders use your credit score as a key factor in approving or declining an application.
- Lenders also use it to decide the interest rate of mortgage, auto, or personal loans.
- Insurance companies use your credit score to help determine your risk level for insurance.
- If your job requires a security clearance, a low score can cause a loss of job or demotion.
Employers or potential employers can access your credit report, with your permission, but they don't see a score. This is the most common credit score myth, according to credit expert John Ulzheimer.
When is a Number Not a Number?
In every credit scoring model, regardless of which bureau reports it, you will be given a credit score (unless there is so little information about you that no score is given). The score can vary from bureau to bureau, and it can also differ within a bureau for different versions of your score.
Still, your credit score number is best understood by looking at the other credit scores with the same credit score range as yours.
Here is one way of grouping credit score ranges:
- Excellent - 750 and above
- Very Good- 700-749
- Good 650-699
- Fair 550-649
- Poor 549 and below
Because creditors use credit score ranges, your number is more than a number. In the ranges above a score of 551 and 648 have more in common with each other than 648 and 652. 551 and 648 are both "fair" credit scores, despite the 97 points that separate them, while 648 and 652 are only four points apart, but one is a "fair" score and the other "good." Lenders are using the scores as a rule of thumb, placing the credit score ranges they decide upon based on their experience judging how borrowers behaved in the past.
Just Like High School
It is similar to getting a grade in school. If you get an 81 and your friend an 89 on your history test you both may get B's. If you get an 89 and your friend a 91, he can get an A and you a B, even though your scores are 8 points apart in the first case and two points apart on the second.
In High School that you and your friend could get the exact same test scores in another class and both get A's, because the second teacher grades on a curve.
This parallels credit scores in that the same lender may put a 659 FICO in the good credit range for mortgages but not for personal loans, where it considers 659 a fair score.
What can make understanding credit scores even more confusing is that one mortgage lender can call 720 and above excellent, and eligible for the best rates it offers and another can say that the best rates are available to borrowers with 750 scores and above. So, 720 can get the best rates from one lender but the other lender doesn't offer its best rates.
Now, consider this possibility. The lender that offers the 720 score its second best rates offers a better rate to its second tier of credit score ranges than the rates from the lender that put the borrower into the excellent credit range.
Your Job as a Borrower
When you are shopping for a financial product that uses credit score ranges to determine the rates or costs, you want to keep a few things in mind.
- You want to come across as an informed consumer. That makes it less likely someone will take advantage of you.
- Ask good questions. Smart questions indicate you are in command of the details.
- Don't be afraid to ask someone repeat information that is not clear to you.
- Write down notes so you can comparison shop
- Be sure you understand the credit score ranges that the lender is using. Pin them down.
- Don't be afraid to ask the loan officer for suggestions on specific actions you can take to boost your score