High Interest Rates / Look To Your Credit Scores
When you buy on credit or apply for loans the determinant factor for approval may very well depend on your "FICO" score. Businesses use this tool to assess their risk when taking on new customers.
FICO is an abbreviation for Fair Isaac and Co, the company that wrote the software used to determine credit scores. They compute your credit score by using a series of tables and mathematical formulas that assign numbers to different pieces of information. The information includes both good and bad deeds. Examples include: payments made on time, amount of debt incurred versus the amount allowed, employment history, and the length of time that credit has been established. This score is a "best guess" on your likelihood or ability to pay your debts in a timely fashion. Currently it is the only widespread, uniform measure of consumer credit risk available.
There are actually three FICO scores. All three major consumer bureaus collect information on individuals and assign values that ultimately yield a FICO score. The three agencies are Experian, Trans Union and Equifax. Some businesses use one score while others take all three into consideration. The underlying problem here is the fact that when you apply for credit, some institutions may use the lowest score so they can charge you a much higher interest rate. While this helps the lender, it costs you hundreds or even thousands of dollars in additional interest.
Because there are three different bureaus using various methodologies to collect their data, your scores will vary. Although the average variation is about 43 points, 5% of all consumers will see variation ranges of 100 points or more. Such a variation means a loan applicant might have to pay an interest rate of 2-3% more!
There are no laws that require lenders to use one rate over another. More often than not, lenders will look at a middle score rather than one of the extremes. However, lenders want to make money too, and they do so by giving you a higher interest rate. Their excuse? You guessed it, a low credit score.
Do Your Part and protect yourself. It is up to you to check your credit for mistakes and errors and keep it up to date.
A national scoring study found that:
- 78% of consumer’s files examined by researchers were missing at least one credit account in good standing
- 33% were missing a mortgage account that has never been late
- 67% were missing non-mortgage installment accounts that had never been late
Incomplete reports that do not include constructive information can hurt your scores. Get copies of your reports. There are many web sites out there that offer free reports and updates on your credit that are simple to interpret and access. Contact the lenders that are not reporting data. You should always be on the lookout for errors. If the lenders refuse to correct them, the FTC is only a click away (www.ftc.gov).
Nothing should stop you from taking care of such an important detail in your financial life.