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Your credit score is one of the most important aspects of your personal finances. Whenever you need to borrow money, your credit will be scrutinized. Yet many people don't know some of the most basic facts about their credit scores.
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To help shed some light on this key part of your finances, we asked three Motley Fool contributors to talk about some things many people don't know -- but should -- about their credit scores. Read through their descriptions and see what you learn about your credit score.
For starters, there is no single credit score, and your score will vary based on the scoring method used. The FICO score is the most widely used, but different lenders use their own algorithms to determine your risk level as a borrower and the interest rate at which they should lend you money. The one commonality across all credit scores, though, is the information it is based on, which is the data contained in your credit reports.
The three big credit bureaus -- Equifax, Experian, and TransUnion -- each collect as much credit data as they can on you. They then sell this information to lenders, which use the data to come up with credit scores. Once a year, you can use the free, government-run website AnnualCreditReport.com to check the data each of the credit bureaus has on you and make sure it is accurate.
Your scores can be greatly affected by one negative transaction that was incorrectly attributed to you. If you see yourself needing to borrow money at some point, it's worth your while to check your credit reports soon and make sure there are no errors in them before you try to borrow money -- otherwise, you risk an expensive surprise when you get quoted a high rate for that new car or house you wanted.
Few people realize that there isn't necessarily a dividing line between a "good" score and a "bad" score. It's not that black and white.
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Based on estimates from MyFICO and Informa Research, the difference between a top credit score (760-plus) and a score just above subprime (620) is massive, particularly for big loans like mortgages. On a 30-year, $100,000 mortgage, a near-subprime borrower will pay $33,000 more in interest than a borrower with a very good score. Borrowers near the middle of the spectrum, who have a credit score of 680, would pay roughly $8,000 more in interest than a top-shelf borrower.
We've been conditioned to believe that there are simply good scores and bad scores -- either you can get a loan or you can't. But the truth is that a decent score, although good enough to qualify for a loan, won't qualify you for the best interest rate. And, over time, the slight difference in interest rates adds up to a substantial amount of money.
Dan CaplingerOne of the things many people don't realize about their credit scores is that they've become an indicator not just of creditworthiness, but also of a whole host of other attributes, some of which may seem entirely unrelated. The name "credit score" has become something of a misnomer, as it now encompasses not only credit, but also trustworthiness and reputation. Insurance companies can look at specially designed scores that are calculated to predict how likely you are to file a claim. Similarly, landlords can access credit scores, although the additional cost involved often leads them to choose instead to look only at credit reports.
One thing to note, though, is that a prospective employer cannot get your credit score. Yet while credit bureaus won't release scores, they will allow employers to see certain elements of your credit history if you provide written authorization during the application process. Some states limit even credit-history checks among employers, but for certain professions, where money-handling and trustworthiness are essential, the checks make a degree of sense.
Your credit score is important enough even when you only consider its impact on your ability to get a loan. Add in these other considerations, and it's clear that you should take the time to protect and improve your credit score.
The article 3 Things You Should Know About Your Credit Score originally appeared on Fool.com.
Dan Caplinger has no position in any stocks mentioned. Dan Dzombak has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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