How Do Credit Scores Affect Your Buying Power?

Have you ever wondered why it is that we can go online and get an approval for credit in less than 60 seconds? What about how you may qualify for one interest rate on a loan while your neighbor may qualify for another? Or how you got pre-qualified for a car without anyone even asking you how much money you made? It all had to do with your credit scoring.

Your credit score is yielded by a mathematical algorithmic program or formula that is based on the information in your credit file and is compared to the information on tens of millions of other people. The number that results from this is a highly precise estimate of how likely you are to repay your debts.

If it sounds unbelievable or unimportant, you couldn't be further from the truth. Credit scores are used extensively, and if you've ever applied for a car loan, mortgage, credit card or auto insurance, your credit score determined the rate you received. The higher the number was, the better you looked in the eyes of the lender and the people with the highest scores are the ones who qualify for the lowest interest rates.

Lenders can opt to use one of many different credit-scoring models to decide if you are creditworthy and different models often produce totally different scores with some lenders using some scoring models more than others. The FICO is one of the more popular scoring models being used today.

The FICO score model usually runs from 300 to 850 with the huge majority of people having a score between 600 and 800. In order to get the most favorable interest rates on a mortgage you will need to have a score of 720 or higher according to the Fair Isaac Corp., a company based in California that formulated the first credit score as well as the FICO score.

Fair Isaac has reported that the American public's credit scores usually fall somewhere within these lines:

Credit scores by Percentage

499 and below 2 percent

500-549 5 percent

550-599 8 percent

600-649 12 percent

650-699 15 percent

700-749 18 percent

750-799 27 percent

800 and above 13 percent

Presently, each of the three major bureaus have their own version of the FICO scoring method. TransUnion has the EMPIRICA score, Equifax uses the BEACON score, Experian utilizes the Experian in addition to the Fair Isaac Risk Model. The scores on these three models are usually different simply because they use different algorithms.

No matter which scoring model the Lenders decide to use, it pays to have a great credit score because your score will ultimately affect whether you get credit or not, and if so how high your interest rate will be. A better score can save you tons of money in interest alone.

Let's look at the following example: A person with a score of 520 and a person with a 720 score is 4.36 percentage points. On a $100,000, 30-year mortgage, that difference would cost more than $110,325 extra in interest charges alone while the difference in the monthly payment alone would be about $307.

If you have ever applied for cell phone service, rented an apartment, applied for a job which involved handling a lot of money, or needed to have your utilities connected, there's a good chance your score will be pulled.

If you ever attempt to have the limit raised on a credit card, the issuer is probably going to look at your credit score as well before deciding whether to step-up your credit line or charge you a higher interest rate.

Understanding how your credit scores can impact you is probably one of the most important things that any consumer can decide to do if they are really as conscientious as they should be when it comes to getting more bang for their hard earned buck.