The Importance of Your Credit Check Score

Three out of four mortgage lenders and auto lending companies rely on your credit check score to determine your trustworthiness as a borrower. If you are ever planning to borrow money for any reason, the importance of this credit rating score cannot be over emphasized.

WHAT IS A CREDIT CHECK SCORE?

The concept of using a score to determine the trustworthiness of a particular borrower was developed by Fair, Isaac and Company (FICO), a data provider out of San Rafael, California approximately twenty years ago. It is commonly referred to now as the FICO score. It is the benchmark in the lending world for establishing your soundness and reliability as a borrower. This credit check score consists of a number ranging from 300 to 850. This innovative scoring system is calculated from the information that your creditors furnish to the credit bureaus. This compiled data is then recorded in your credit report.

HOW DOES THE CREDIT CHECK SCORE AFFECT THE BORROWER?

In the not so distant past the only way to really keep track of your credit was to pay for a credit report and hope (while keeping your fingers crossed) that paying all of your obligations on time and other valuable habits would make you deserving in the eyes of the almighty lender. The credit check score was available to the lender but not to the person who was applying for the credit.

It was not until recently that this mysterious piece of your financial picture, your credit check score - the authoritative guideline that the lenders relied on - became available to the consumer for the first time. This was really a powerful tool for the borrower, because now they could begin to see how to help their financial profile look more attractive to the lending agencies.

WHAT DOES THE CREDIT CHECK SCORE TELL THE LENDER?

So what does this credit check score (also known as your FICO score) that all the banks, mortgage lenders, credit card companies and other lending entities use, actually tell the lender? In a nutshell, it shows the loan company just how trustworthy you are with your creditors.

The theory behind this scoring model is that previous financial behavior will indicate future performance. That is, the higher your credit check score, the more likely the statistical probability is that you will repay the loan in a timely manner.

HOW IS YOUR CREDIT CHECK SCORE DETERMINED?

This credit rating score is determined by measuring your borrowing history with all the other people in America who also have a credit history. The financial experts using certain forecast models analyze a certain number of consumers who started a loan or opened a line of credit at the same time. They then determine who actually paid back the debt or who defaulted on the loan. These specialists also look to see how quickly the loan was repaid. Both kinds of borrowers - the payers and the non-payers - are looked at to find the traits they had in common when they applied for their loans.

WHAT NUMBER IS A GOOD CREDIT CHECK SCORE?

So once the score is determined, what do the numbers represent? In the world of lending a credit score above 700 is considered a fairly secure loan to underwrite. If the credit check score is in the 600 range, it presents more problems. The FICO forecast model indicates that the delinquency rate for borrowers with a credit rating score of 630 is approximately 30 percent. Those borrowers with scores of 750 have a default rate of only 2 percent.

WHY IS IT IMPORTANT TO HAVE A HIGH CREDIT RATING SCORE?

This important credit rating score is used to decide how much of a risk you represent to the lender. So in the beginning stages, it can certainly be the difference in whether or not you even get the loan.

The second factor is also extremely important to the borrower, because the credit check score also establishes the rate of interest the lender will charge. Obviously, if the lender considers you a higher risk he will accordingly charge you a higher rate of interest on your loan. This can ultimately cost the borrower thousands of dollars over the life of the loan.