What is your credit score and why is it important?
Your credit score is a mathematical value designed to tell creditors how good you are at paying back the money you have borrowed. In other words, it measures how creditworthy you are. Lenders, such as Credit Unions and Banks use your credit score to determine how much risk is associated with making a loan to you. Credit scores are used to help define who does and does not qualify for a loan, what the interest rate of the loan will be, and how much credit they are willing to extend.
Your credit score is a very important thing. It not only affects your ability and cost to borrow money, but it also affects other things. Insurance companies, landlords, potential employers, government agencies, and other organizations use credit scoring to determine how much you should pay for insurance, whether you should be hired or not, and more.
Perhaps the best-known and widely used credit score model in the U.S. is FICO. It is also the model that has been in use the longest. FICO stands for Fair Isaac Corporation, the developer of the FICO Score. FICO creates and produces scores used by Equifax and TransUnion. Experian no longer uses the FICO score as its scoring model and instead uses their own “PLUS” system. In addition, the three companies also use VantageScore which is a competing score technology to FICO.
FICO Credit Scores in the United States range from a low of 300 to a high of 850. The median FICO Score as of 2017 was approximately 695. A FICO Score of less than 600 designates a high-risk borrower with 640 or above being fair to good. A FICO Score of 700 or greater designates a very good borrower. The problem is that other scoring systems often score borrowers differently than FICO. That’s why, when you want to get your credit score, you need to get all three. Your FICO score is, essentially a weighted average of five different categories: Payment History, Amounts Owed, Length of Credit History, New Credit, and Types of Credit Used. For in-depth information on what’s in your FICO score, go to www.myfico.com. This website is created and owned by Fair Isaac Corporation and gives in-depth information about Credit Scoring and Credit Reports.
In Experian’s State of the Automotive Finance Market First Quarter 2018 study, they ranked credit scores in five categories: Super Prime, Prime, Nonprime, Subprime, and Deep Subprime. Super Prime and Prime credit scores range from 850 to 661. And, the Nonprime to Deep Subprime scores range from 660 to 300. You want to fall in the top two categories to receive better lending arrangements, like less than 1 percent annual percentage rate (APR).
The study also presented the different average credit scores based on new and used vehicles. In the 2018 first quarter, the average lease score for a new vehicle was 724, which falls in the Prime category. The average lease score for a used vehicle was 672, which falls in the Prime category. The largest percentage of new leases went to Prime credit-score holders at 45.42%, and the lowest to Subprime scorers at 8.20%.