Your credit score is typically represented as a three-digit number that lenders use to help them understand your future credit risk. To understand what that three-digit score means, you need to review it in the context of where it resides in the overall credit score scale. A score of 350 can have a drastically different meaning if it is tied to a 300-950 credit score scale versus a 200-400 credit score scale.
While the specific credit score scale can differ depending on the developer of the credit score, it is standard practice that lower scores equate to higher risk and higher scores reflect consumers with lower risk.
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While knowing the exact score is important so you know where you stand relative to the credit score scale, lenders will typically make credit granting decisions and decisions related to the terms of the credit extended (the amount of credit they will extend and at what interest rate) based on credit score ranges.
For example, the table below illustrates how the interest rate for a 3-year automobile loan varies by FICO credit score ranges and not by individual score values. All consumers who score 720 or greater on the credit score range would receive the same rate (assuming they pass the lender’s other criteria).
The table illustrates the importance of not only knowing your three-digit score, but also understanding where it could fall in the credit score ranges a lender uses to make credit granting decisions. For example, a score of 619 is only 1 point different from a 620, but results in a higher interest rate as the scores are at the cutoff point between ranges.
A challenge for consumers is that lenders do not typically reveal their credit score cutoff strategies and they usually have other criteria an applicant must pass before approving the request for credit.
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As such, your best bet is to do your homework before applying for credit to find out what you can about potential credit score ranges in practice and make sure your credit score is as high as you can get it at the time of your credit application to secure more favorable terms. Get your free credit score along with a free credit report card to see you currently stand and what you can do to improve your score.
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