- When you apply for a credit card, an auto loan or a home mortgage, one of the first orders of business is for your credit report to be run. Many companies use credit scores as a basic guideline for qualifying before they look at other information on your report. For an auto loan or smaller loan, only one of the three major reporting bureau scores may be used. For a mortgage, all three are used.
- Credit scores, often called FICO scores, are derived from a formula created by Fair Isaac Corporation. Approximately 35 percent of your score is based on your payment history, 30 percent on how much you owe, 15 percent on the length of your credit history, 10 percent on new credit and the final 10 percent on other factors. On-time payments maintain higher scores, while factors such as late payments, foreclosure, bankruptcy and other negative issues reduce your credit score.
- When considering how much your credit score matters, consider the impact your score has on the interest rate you pay for a mortgage. A borrower with good income from steady employment and a FICO score of 800, considered an excellent score, may qualify for a mortgage at the best available interest rate at the time. With a weaker score of 625, that borrower's rate may be 2.5 percent per year higher, costing a couple of hundred dollars more per month or thousands of dollars more per year.
- Utility companies, cell phone carriers, auto insurance companies, potential landlords and potential employers all may be taking a look at your credit report before they move forward with you. Life can become an expensive proposition when you are faced with paying a heavy deposit just to open an account with the electric utility or water company. Not being accepted as a tenant because the landlord finds your credit unworthy can be frustrating, and you are likely to pay a higher rate for your auto insurance if your credit score is low because they consider it a measure of how risky you are for them to insure.
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