When you apply for credit, whether for a mortgage, an auto loan, or a credit card, your credit score will determine whether or not you can secure financing, and what type of interest rate you can get. While you probably have at least some idea of how good or bad your credit is, it is important to understand your credit score and how it is calculated.
A credit score is a three digit number that ranges from 300 to 850. Each of the three major credit bureaus use this rating system that was devised by the Fair Isaac corporation - commonly called a FICO score. Your FICO score is calculated by measuring three distinct aspects of your credit.
1.A third of the score is based on your payment history. If you have defaulted on one or more loans, or been more than thirty days late making payments on your credit accounts, your credit score will be adversely affected.
2.The next portion of your credit score is determined by your credit to debt ratio. If you have a number of credit accounts close to being maxed out, or if your total debt is too great, this part of your score will suffer. Conversely, if you keep your credit balances reasonably low, your score will be higher.
3.The final part of your credit score takes three separate factors into account: the length of your credit history, the amount of credit for which you have recently applied , and the type of debt you have. Of the three, the length of your credit history holds the most weight. If you have established a long history of repaying your debts on time, you will be looked upon as less of a credit risk. Another aspect of your credit score is the number of recent applications you have. The greater the number, the lower the score. Finally, the types of credit you carry will affect your credit score. A credit card from a bank would have a more positive effect on your score than would a store credit card. Applying for credit with a finance company could label you a higher credit risk, and may be seen as a last resort for someone who could not get a bank card.
Once your score has been determined and made available to prospective lenders, it is often the only factor considered in determining your eligibility for credit and the interest rate you will receive. A higher FICO score will translate into savings when you apply for credit. A lower score may increase your interest rate which may cause you to have to borrow more money than you would have otherwise.
Also, information provided by credit reporting companies is not always accurate. You should acquire a copy of your credit report for inconsistencies and inaccurate items. If you find any questionable items on your credit report, you have the right to dispute them and possibly have them removed.
Once you understand the effect that debt and use of credit has on your credit score, you can devise a plan to make any necessary repairs to your credit. As your credit score improves, you will pay less when you borrow money, and you will find more and more lenders eager to do business with you.
Understanding Your Credit Score
It is important to improve or protect your credit scores. To do this you have to have some knowledge of where this number comes from. It is a complex system that is used to determine a persons credit scores. But it is helpful to try to understand it.
How Your Score Is Composed
There are a few things that are reviewed by companies in order for them to compose your credit score. They look at your past payment history. How well you pay your bills and when you pay them. They pay close attention to your outstanding debt. If you have too much debt, your score will be lower. It is also composed of how long you have had your credit history. If you are just starting out, your credit score may be lower even though you do not have any bad points on your report.
Other Factors That Affect Your Score
Credit companies also want to see how much credit you are applying for. If you have filled out a number of credit card applications this will reflect poorly on your credit report. Also having a lot of outstanding debt with large balances and/or high rates of interests will bring your credit scores down.
Do You Have an Excellent Credit Score?
Any score that is 700 or above is considered a great score. If you have a score with 700 or above, you will have no problem getting credit at a great interest rate. A score of 650 and below defiantly has room for improvement. A score between 650 and 450 needs to be worked on. You will probably have a harder time getting a loan or any type credit without securing it. This means that any loan that you apply for will need to have some kind of collateral in place to secure it. If you have a score of 450 or below, then you desperately need to get some help with your credit. It is likely that you will not get any type of credit or loan unless you receive some form of counseling to improve your score.
Getting the Help That You Need
There is help available for you when you are looking to improve your score. There are places that will offer free credit counseling. They will show you ways to get your score increased and help you be more responsible in your financial decisions. Getting the help now with your score will get you on track faster.
Both Gregg Pennington & William Blake are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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