When it comes right down to it, we are just a number. There used to be
a time when people applying for a loan would be judged by the Three
C’s; namely, Credit, Collateral, and Character. Yes, there was a time
that you could get a loan just because the banker liked you.
Times have changed. With the age of technology, everything has become
impersonal, including the lending business. The Three C’s have been
reduced to one: Credit Score. Your best chances of obtaining a loan,
then, depend on your understanding of this vaunted number.
Your credit report is a report card of how well you manage your debts.
Like your grades in school, the higher your score, the better your
chances of success.
Scores range from 300 to 800, with most credit reports scoring in the
range of 480 to 760. There are three major credit reporting agencies.
They are Equifax, Experian, and TransUnion. Each of these three credit
bureaus has its own proprietary formula for calculating your credit
score.
Similar to being judged at a figure skating competition, each bureau
has its own interpretation of your “performance” as a borrower. Factors
that go into calculating a credit score include your payment history,
the quantity of your open accounts, the ratio between your credit
limits and outstanding balances, and lender inquiries to name a few.
How does your score work in terms of getting a mortgage? Different
mortgage companies have different ways of interpreting your score.
Commonly, for example, you’ll find lenders referring to the “middle
score.” Upon looking at your credit reports, you might find,
hypothetically, that Experian gave you a score of 630, TransUnion 610,
and Equifax 634.
In this case, your “middle score” is 630, and would be the basis on
which your creditworthiness is judged. In essence, the high and low
scores would be “thrown out” and disregarded. Note that not all lenders
work this way. Some will take only your lowest score, some will take
only your highest, and some might consider a combination or average of
the three.
The important thing to remember is that your score is only a number, a
common denominator to which everyone can relate. Just like the weather,
everyone can relate in terms of the degree of temperature. However, the
interpretation is relative. For example, 80 degrees might be considered
hot to one person, and it might seem cold to another. Similarly, a
score of 630 might be considered “good credit” by some lenders and “bad
credit by others.
With all these different interpretations and variables, one thing is
for absolute certain. Having the highest credit score possible is your
very best bet. The ramifications of having a high credit score are
enormous. With a high score, you can qualify for lower interest rates,
lower down payment requirements, and faster loan processing times among
other numerous benefits. In other words, it can NEVER work against you
to have the highest possible credit score. With it, you can achieve
savings of time and money that translates into thousands of dollars per
year, every year.
