What Are Credit Scores?
Simply put, credit scores are a measure of how much risk a potential borrower poses to a lender. From a lender’s perspective, a high score suggests the borrower poses a low risk and therefore reassures lenders that they will be repaid in full, and on time. From a borrower’s perspective, a high score will increase the chances of being approved for a mortgage, auto loan, credit card, etc, as well as being offered the most favorable loan terms (i.e. lowest rate of interest).
How Are Credit Scores Calculated?
Credit scores are calculated based on several key indicators – payment history, the types of credit held, the amount of available credit being used, the number of times credit has been applied for recently, and the length of time credit has been held for. Certain indicators are more important than others, and therefore impact credit scores differently.
What is the difference between a Credit Score and a FICO Score?
A ‘credit score’ is the general term used to describe the number representing risk. A FICO score is a specific ‘brand’ of credit score. Another ‘brand’ of credit score is VantageScore (there are also others, but these are the two main ones). Conceptually, I find it helps to think of a credit score as a shoe (a specific type of footwear), and FICO / VantageScore being like Nike / Adidas (the specific brand of shoe).
What Do You Need Credit Scores For?
A lender will use a borrower’s credit score to decide (a) whether or not to extend credit to the borrower; and (b) on what terms (i.e. the interest rate, fees, term, etc.). Directly and indirectly, credit scores can determine where someone lives (mortgage), where they go to school (student loan), and what kind of car they drive (auto loan), etc; in essence, credit scores can significantly impact the quality of a person’s life.
Credit Scores To Buy A House
A house is the biggest and most expensive purchase many of us will ever make – as a result, most of us need to borrow money to buy one.
A higher credit score will generally result in (a) more lenders willing to lend; (b) lenders willing to lend a higher amount; and (c) a lower rate of interest and therefore less money to pay back in the long term.
As a higher score indicates less risk, lenders are willing to take a smaller return (in the form of interest) on their investment (the mortgage money lent).
When Are Credit Scores Updated?
Data is constantly being collected, added, and updated by the three major credit bureaus – TransUnion, Equifax, and Experian. The credit bureaus receive information from lenders, often on a monthly (statement cycle) basis, and generate a credit report – detailed information about your credit history. Fico and Vantage Score are the two major models used to generate a credit score – a numerical summary of the data in your credit report. In short, credit reports and credit scores can change daily, weekly, or monthly – there is no fixed answer.
GET HELP UNDERSTANDING YOUR CREDIT SCORES
Life Streamliner’s goal is to empower consumers and even the playing field between borrowers and lenders. Life Streamliner simplifies complex concepts, identifies issues to address and guides its clients step-by-step to increase credit scores as quickly and cost-effectively as possible. Your Life Streamliner Financial Strategist will apply their many years of financial, legal, and technical experience to solve problems using unique yet tested methods – all while equipping you with the tools to confidently handle similar (and new) situations in the future. Let Life Streamliner teach you!
Already know what you need? Schedule your FREE consultation!