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One in four Americans have credit trouble

Discipline key to climbing the mountain

Published: Saturday, Sept. 22 2012 1:00 p.m. MDT

During the past five years, what is needed for preferred credit status has changed. In 2007, 620 was considered a suitable credit score for better interest rates. Today 680 is the minimum and 720 is the preferred baseline score for most potential creditors, speaking of FICO scores, the industry standard

He said that in the current credit environment, someone applying for a mortgage with a 620 credit score would likely pay an interest rate that is 0.5 percent to 0.75 percent higher than previously.

“The risk really impacted people all along the credit score spectrum, especially those below 680,” Bingham said. “(If you’re under 680), you’re going to get hit pretty hard.”

That means paying more to obtain credit cards, auto loans, home mortgage loans and insurance products — roughly 60 percent to 70 percent more than just a few years ago, he said.

“Lenders are taking on more risk and they have identified that the credit score is a huge indicator of credit risk,” he said. “They’ve (figured out) that they have higher default rates at lower credit scores and they are going to start charging more interest.”

Originally founded in 1956 as Fair, Isaac and Company by engineer Bill Fair and mathematician Earl Isaac, FICO is a measure of credit risk that is available through all of the major consumer reporting agencies in the United States Equifax, Experian and TransUnion.

The credit score range for the standard consumer FICO score is 300 to 850.

According to thetruthaboutcreditcards.com, the most important factor in determining your FICO score is payment history —accounting for 35 percent of the overall scoring criteria. Payment history includes all revolving and installment accounts, including mortgages, auto loans, credit cards, charge cards and student loans. In addition, this section also takes into account public records and collections, bankruptcies, foreclosures, tax liens, judgments, and charge-offs.

Another important factor in determining your FICO score is the amount owed on accounts, including the total balances on each one of your lines of credit in proportion to the amount of total credit available. For example, if you have $10,000 in total available credit with an $8,000 balance leaving just 20 percent left available, then your credit score could be adversely affected because creditors could consider you overextended.

A third factor in determining a consumer’s FICO score would be the length of credit history established. A consumer with a long mortgage history will likely have a stronger credit history than someone with a long history of just using credit cards.

When measuring credit scores, a rating in the 800-850 range is considered the ultimate. Consumers in that range have essentially flawless credit.

A credit score of 760-799 is considered good to excellent, and will usually receive interest rates and approval rates similar to those in the 800-plus category.

A credit score in the 720-759 range is not that much different from the previous category, though there are some credit thresholds for FICO scores of 760 and above.

A score in the 680-719 bracket is still considered to be good credit, though possibly with a minor flaw or two. Most consumers in this range would probably still be able to qualify for most loans and auto or rental leases, however, interest rates may be higher.

Credit scores from 620-679 are common and loans can be obtained. But depending on the lender, there may be restrictions and the path to a new car or credit card will be more expensive.

For those consumers in the 580-619 range, they fall into the higher risk category. Credit scores in this range are clearly below average, and would have a tough time securing a loan or applying for a credit card.

On the lower end of the spectrum, FICO scores in the 500-579 bracket are in need of repair. Consumers in this range often have a major derogatory mark such as a collection, charge-off, mortgage default, foreclosure, or bankruptcy.

Those with FICO scores below 500 may want to consider contacting a professional to help improve their standing.

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