What Is Credit?

In my experience as a Credit Adviser, the most shocking thing I have learned is how little most consumers know about their credit scores, much less about The Credit Industry in general. Let's brush up on a little history, shall we?

My lesson begins at the beginning, long ago in the late 1950's when the Fair Isaac Corporation concocted a mathematical formula to blah, blah, blah, history. Someone made a way to base your credit worthiness on a combination of different factors on your credit reports. Thus, the FICO score was born! Thrilling stuff, isn't it? You will have one score with each of the three major credit bureaus: Equifax, TransUnion, and Experian.

Equifax is the oldest of the three. TransUnion seems to be the most lenient for the majority of my clients. Experian – the thorn in my side, and probably yours as well – is the youngest bureau. There are multiple credit reporting agencies, but you'll find that in most cases, your credit worthiness will be judged based off of your rating with those three.

What is Your True Credit Score?

You have three scores – one from each bureau – and they are almost always different. There are many contributing factors, but essentially the difference in your scores is due to the differences in your credit history on each report, which is what your credit scores are based on. Why would your credit history differ on each report, you ask? Because your rating with a bureau is constantly fluctuating. The three credit bureaus update their information at different times, causing negative items to fall off of the reports at different times. In addition, not every bank bothers to report to all three bureaus. Some institutions will only report to one or two and what they're reporting – good or bad – will affect your credit history on that select report.

Unfortunately, one true credit score doesn't exist. Three true scores don't even exist. You're credit worthiness will be different with every source. Whether you're getting your numbers from a bureau, viewing your rating with a creditor when applying for a loan, or checking it on the web, you'll rarely find two scores that are exactly the same. This is why I base my decisions on my FICO scores, which seem to calculate nice averages for me and are often used by third parties. You can view your FICO scores for a fee at myfico.com. If you're worried about being approved for a loan or credit card, call the desired creditor before you apply and ask them where they pull their credit ratings from. You'll be able to find your appropriate score online or order it from the right bureau so that you can have a good idea as to whether or not you'll be approved.

A Very Fine Line.

Just exactly how high does your credit score have to be in order to be approved for credit? That's a very good question. The hardest part about being a Credit Adviser is trying to find a solid, simple, implacable answer to these types of questions. The truth is, when it comes to The Credit Industry, nothing is black and white. You shouldn't expect one easy answer to any question.

What scores are considered good and bad? What score has the potential to get you a line of credit? It's different for every situation you're applying for. If you're aiming at getting a mortgage loan, you'll need your score considerably higher than if you were just applying for a credit card with a $300.00 limit. Essentially, the scores are graded as such:

• 350-619: Poor credit. On the standard scale, the lowest score is 350 and until you've reached 620, your chances of being approved a quite slim.
• 620-659: Sub-prime. Good, not great. You have the chance of being approved for small loans, credit cards, and secured cards. Keep in mind, your interest rate will be absurd.
• 660-720: Prime. You're likely to be approved for lines of credit and there will be a rewarding difference in the interest rates.
• 721-750: This is a great credit score! You may be able to qualify for interest rates on loans that are even lower than the prime rate.
• 750+: This is an excellent rating. The world of credit is in the palm of your hand. And interest? What's that?

The ratings may vary per creditor and situation, but as you can see, just a 50 point difference in your credit score can drastically affect your chances of being approved and alter how much you're paying in interest. Click here to find out how much extra you'll have to pay in interest because of your credit rating. Your score could be costing (or saving) you $5,000 on interest ALONE on a car loan.

Great Score, Poor History.

Now that you're educated on the different credit ratings and you have a good idea on where you stand when it comes to going out and getting that new car loan, let me tear down your new found clarity with some gray areas. Any consumer with a high credit score still has a chance of being denied for credit. Here are a couple reasons why:

• Lack of credit history (for new consumers)
• Negative items (late payments, collections, etc.)
• Debt to income ratio (you owe too much debt in credit or collections)
• Too many hard inquiries (marks that appear each time you apply for credit)

You may have a great score, but when it comes to lending a consumer hundreds of dollars, the creditor looks at more than just your numbers. Banks and lenders look at your payment history, how much you owe to other creditors, and how frivolous you are with your credit profile.

Now that you've brushed up on your knowledge of the credit industry, let's begin the reparations. If your score needs a little mending, stay tuned for many new posts on the act of building or repairing credit. In the mean time, you can start with these 5 Fast and Easy Tricks to Improve Your Credit Score!