If you are somewhat or completely confused by credit scores (often called FICO Scores), you are not alone. In fact, you are probably part of the majority that finds themselves befuddled by how credit bureaus compile, calculate and use these scores to determine your creditworthiness - often with the input of credit card companies and other creditors.
A credit score is simply a numeric value that has been assigned to your historical credit habits. The original company that pioneered the creation of this score is called Fair Isaac and Company, which forms the acronym "FICO".
The combination of credit bureaus, credit card issuers and massive databases that warehouse consumer data means that virtually every American now has a FICO score. And, this score is vital to determining whether a person can access low-cost credit, something more expensive or even not being able to get new credit at all.
In general, the higher the score, the lower the interest rate a person will have to pay on a new credit card or consumer loan. Conversely, a lower score will translate to higher interest and less desirable terms.
FICO credit scores can range anywhere from a low of 300 all the way up to 850. Lenders generally segment scores into six ranges for the purpose of determining to whom they will make credit offers and at what terms. Anyone below the sixth tier can usually only obtain credit from a sub-prime credit card lender at very high interest rates. Listed below are the six average credit score ranges used by many of the nation's largest credit card, mortgage and auto lenders:
- 720 – 850
- 700 – 719
- 675 – 699
- 620 – 674
- 560 – 619
- 500 - 559
Individual banks solely determine the credit terms that they offer to each FICO score tier, but in general the best offers go to the top tier. Many of the top credit card issuers specialize in super-prime lending, meaning they target consumers with these tier 1 credit scores. However, competition among the largest issuers could allow those in lower tiers to be considered for leading offers, like those that feature 0% APR introductory rates.