What Do Your Credit Scores Say About You?
, by Rob Kaufman
Your credit score says more about how you manage money than about how much money you have. Some people believe that a credit score represents one's wealth - the higher the score, the more money one must have. Simply stated, that's a myth and nothing could be further from the truth.
Good Credit Score, Bad Money Management
There are various scenarios in which someone can have a high credit score and mishandle their finances at the same time. For example:
Let's say you meet your credit card's payment deadline each month. Your FICO® Score will probably reflect that since payment history (how timely you are with your payments) makes up 35% of your score. However, if you're only paying the minimum amount due and carrying a balance each month, you're creating debt that could take years to pay off. So yes, your FICO® Score may be high, but so is your debt.
Another example could be how your handle the amounts you owe on your credit accounts. Credit utilization (the amount of debt you owe divided by your total available credit limit) determines 30% of your FICO® Score. Some people try to enhance this credit score factor by increasing their total amount of credit (i.e. opening new credit card accounts or taking out a loan). There are a number of potential issues with this strategy, namely: you could end up spending more money because you have more credit and/or you won't be as concerned paying the credit you currently owe.
The other side of the coin are those people who pay on time, have very acceptable credit utilization, possess a great credit mix and still have a low credit score due to past financial mistakes they (or their spouse) made years ago. In time, if this positive financial behavior stays consistent, these people's credit scores could eventually rise.
From a Lender's Perspective...
Hopefully, it's clear that from a consumer's perspective, we can't judge a book by its cover - or its credit score. However, from the viewpoint of a lender, things are quite different. A lender analyzes your credit score with one question in mind: how reliable of a borrower are you? That number along with a few other factors could mean the difference between a loan acceptance or denial
Here's what lenders might see when looking at your score:
This score is exceptional and indicates that the borrower is much less likely (1%) to become delinquent with their payments.
740 - 799
This score is very good and, like 800+ scores, is above the national average. Only about 2% of borrowers in this range are likely to become delinquent on loans or other types of credit.
670 - 739
This score is good and is seen as an "acceptable" borrower. This means the lender might not offer as low an interest rate as those with higher scores because about 8% of borrowers in this range are likely to become delinquent.
580 - 669
This score is fair and below the national average. Borrowers in this range will be more likely to pay a higher interest rate than those with better credit since the likelihood of a borrower within this range becoming delinquent with payments is about 28%.
579 and lower
This score is poor and borrowers within this range might have to place a deposit or pay a fee to obtain a credit card or home utility services. About 61% of borrowers in this range are likely to become delinquent.
Check out what other members are saying about their credit scores and how they've been able to increase over time.