Credit Report Rating & Your Purchase Power

Credit report ratings play a major role in your purchase power. 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 Report Rating?

Your credit report rating (or “score”) is the number that banks and credit institutions use to assess your credit risk, based on a formula that measures your credit history and current credit accounts. The three major credit bureaus, Experian, Equifax and Trans Union, 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 score can differ from credit bureau to credit bureau. While credit scores themselves can range from 350 to 850, a score of, say, 700 from Experian is generally considered the equivalent of a 700 score from Equifax or TransUnion. Regardless of which bureau supplies your credit report rating, the higher your score, the better your chances are of securing a loan and getting a favorable interest rate.

What's a Good Credit Report Rating?

The magic number for a credit report rating these days is about 650. If your score is 650 or better, you're considered a good credit risk (that is, 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 can also qualify for a desirable loan, but you may need to provide the lending institution with additional documentation to prove that you're creditworthy.

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 .