Credit Report Rating & Your Purchase Power

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Credit report ratings play a major role in your purchase power and help define your overall credit history. While your credit report rating shouldn't have any effect on your ability to, say, enjoy dinner and a movie with that special someone, it can — and will — affect your ability to secure a loan for big-ticket items like cars, homes, or even household renovations that you might want a bank to finance.

What's a Credit Rating?

Your credit report rating (or your "FICO score") is the number that banks and credit institutions use to assess your potential credit risk, based on a formula that measures your credit history and current credit accounts. The three major credit bureaus, Trans Union, Experian and Equifax, each develop a score based solely on the information in their files on you.

Because each bureau can and does receive information from different banks and creditors, your credit score (also referred to as "FICO score") can differ from credit bureau to credit bureau. While credit scores themselves range from 350 to 850, a FICO score of 700 from Experian is generally considered the equivalent of a 700 FICO score from Equifax or TransUnion. Regardless of which bureau supplies your credit report rating, the higher your FICO score, the better your chances are of securing a loan, with a favorable interest rate and ultimately having a stronger more solid credit history.

What's a Good Credit Report Rating?

While each lender decides what credit score it considers a good risk, if you're credit score is generally 650 or better, you will probably be considered a good credit risk (meaning, you're likely to pay off a loan on time and in full), and you'll therefore qualify for a prime (i.e., desirable) interest rate. If your credit report rating is between 620 and 650, you may also be qualified for a desirable loan, but you may need to provide the lending institution with additional documentation to prove that you're creditworthy.

Credit scores below 620 put you in a greater risk category in the eyes of lenders, which means you'll probably have to pay a higher interest rate (also known as a "subprime" rate) on your loan. A low credit report rating will also limit the amount of credit or the size of the loan you're able to receive.

When it comes to sizable loans, a difference of a point or two in your interest rate can translate into thousands of dollars over the course of paying off the loan. And sending extra money every month to a lender rather than putting it toward other items will clearly affect your purchase power. Therefore, it's in your best interest to do everything you can — from paying off outstanding loans to making credit card payments on a timely basis — to achieve the highest possible credit report rating.

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