TONY KRIZ AND JARED GARDNER
RESIDENTIAL AND INVESTMENT
EXCERPTED FROM “THE POWER OF CREDIT SCORES” by Pat Curry • Bankrate.com
Ever wonder why you can go online and be approved for credit within 60 seconds? Or get prequalified for a car without anyone even
asking you how much money you make? The answer is credit scoring. Your credit score is a number generated by a mathematical
algorithm based on information in your credit report, compared to information on tens of millions of other people. The resulting number is
a highly accurate prediction of how likely you are to pay your bills.
If it sounds arcane and unimportant, you couldn't be more wrong. Credit scores are used extensively, and if you've gotten a mortgage, a
car loan, a credit card or auto insurance, the rate you received was directly related to your credit score. The higher the number, the better
you look to lenders. People with the highest scores get the lowest interest rates.
The scale runs from 300 to 850. The vast majority of people will have scores between 600 and 800. A score of 720 or higher will get you
the most favorable interest rates on a mortgage, according to data from Fair Isaac Corp., a California-based company that developed the
credit score. (Its own score is called the FICO score.)
What's the Big Deal?
Your credit score will determine if you get credit at all, and the interest rate on that credit, says Ed Ojdana, president of Experian
Consumer Direct, part of Experian, the largest of the three major credit-reporting agencies. "The better the score, the lower the interest
rate and that can save you a ton of money." The difference in the interest rates offered to a person with a score of 520 and a person with a
720 score is 3.45 percentage points, according to Fair Isaac's Web site. On a $100,000, 30-year mortgage, that difference would cost more
than $85,000 extra in interest charges, according to Bankrate.com's mortgage calculat