MONEY OBEDIENCE

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The credit score is a number that a credit reporting agency assigns to each individual person. Many things such as your bill and loan payment history, the amount of times you apply for credit, and the overall credit limit on all active credit cards determine your credit score.

This credit score has a tremendous influence on your financial life. Credit scores are taken into consideration to predict the likelihood that you will default on a loan or fail to pay a credit card balance. The higher or better your credit score the easier it will be for you to get a loan or a mortgage and the better the terms of such loans will be.

Say you want to take out a $200,000 30-year fixed rate mortgage. Let's say you have a high credit score. In that case the interest rate you pay could be 6.0%. This makes for monthly payments of $1,179. Now, if your credit score is low and you actually get a loan, you may have to pay an 8.5% interest rate, which would require monthly payments of $1,494 or $315 more ever single month for 30 years. With the higher interest rate by the time you pay off the loan, you have paid a total of $113,319 more than you would have paid with the lower interest rate. In other words, banks require higher payments from people with low or poor credit scores. The point is to get more money from these people up front, as they are at greater risk of failing to pay. It makes sense that banks would do this. They have to safeguard against the higher likelihood of debtors not paying back their loans. Those who have a history of not paying are a higher risk so they are assigned higher payments to offset this risk.

You can get your actual credit score for free from sites like www.creditkarma.com. In addition, under a new Federal law, you have the right to receive a free copy of your credit report once every year from each of the three nationwide consumer-reporting agencies. To request your free annual report under that law, you may go to www.annualcreditreport.com. You may also view the individual sites for these credit-reporting agencies. (See the list at the end of this article). However, to get your actual score from these agencies requires a nominal fee. Whenever you apply for a loan and your credit is checked you may also ask the lender for a free copy of your credit report.

CREDIT SCORE COMPANIES

• Experian
• Equifax
• Transunion