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Friday, December 9, 2011

Your Credit Score Connection To Life

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.
Being 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.

The 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.

Your 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.

This 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.

The 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. 

If 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.

Usually, 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.

Both 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.

This 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 financial health.

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.

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