A person's credit score is a financial score that determines at a quick glance how well they have managed their available credit. It's important to have a good credit score, because very few people will be able to pay cash for the things they want and need in life, like a home or a new vehicle, or even that dream vacation on a tropical island.
able to own today what you can pay for tomorrow keeps the average
American dream within reach. Your credit score is requested from one of
three major credit reporting agencies (Experian, TransUnion and Equifax)
when you put in an application at a bank or finance company for a loan
or a credit card.
reason for this is to see if you have a good history of paying back
past credit obligations. Your past lenders will provide this information
to these agencies and then will in turn sell this same information to
any future lender. The higher your credit score is, the better chance
you have of receiving the loan you are asking for.
credit score will also come into play when interest charges are being
calculated. The higher your credit score, the lower the interest charges
will be. The lower the interest charges, the less money that you will
actually have to pay back when the loan is finally paid off. This
translates into thousands of dollars in savings. Most credit reporting
agencies use the FICO (Fair Isaac and Company) credit scoring system.
system uses numbers between 300-850 to calculate your credit score.
Potential lenders will consider higher scores to be less of a credit
risk. Just about every lending company out there will request a credit
score from one of the three credit reporting agencies or in some cases,
all three of them. The exact formula for calculating your credit score
is considered a trade secret, but a basic understanding of how it is
figured will help you work towards achieving a higher credit score.
first 35% of a person's credit score is determined by whether or not
they made payments on time or if they had any late payments in the past.
Debt write-offs, tax liens, judgments and bankruptcies will also have a
very negative effect on someone's credit score. The next 30% of your
credit score is based on how much overall debt you owe. If your credit
cards are maxed out and you have quite a few of them, this does not look
like you are managing your finances very responsibly.
possible, it is advisable to keep credit card balances low. Just
because you are offered more credit, doesn't mean you have to use it. If
it appears on your credit report that you are already way overextended
in relation to debt, it is not likely that you will be offered more
credit. The length of your credit history is worth 15% of your credit
score. It's hard to estimate how well someone will pay back a loan if
they haven't been paying debts for very long.
at least six months of credit history is needed to calculate this part
of your credit score. A look at how well a person has been paying will
factor into this number as well. The FICO credit scoring system can
determine when someone is shopping for the best interest rates on a
mortgage loan and also when someone is applying for every possible
credit card available just to get more available spending.
of these types of inquiries will appear on your credit history, but
only the latter kind will adversely affect your credit score by 10% of
the total credit score. It looks good on a credit report to have a good
mix of credit. For example, it is a normal part of life to have a
mortgage loan, buy a new car, have a few credit cards and so forth.
However, it appears a little bit unstable if a person has no other
credit record besides 17 credit cards.
mix of credit will make up the last 10% of the total credit score. Some
things that will not affect a person's credit score is their race,
religion, sex, color or marital status. A person's income or place of
employment will also not be factors in calculating their credit score.
It is important to know what your credit score is and do your best to
maintain a good credit score. It is a step towards achieving good
You can purchase your credit score from one of the three credit reporting agencies. If there are mistakes on your credit report, fixing them will improve your credit score. Other than correcting errors, time and a good paying history are the only things that will improve your credit score.