As unbelievable as it may sound, most consumers are not aware of what their credit score is. For as valuable a piece of information as that is, it is almost unthinkable for one not to know what their credit score is, or at least approximately what it is. You see, your credit score is used for much more than just deciding whether you should be approved for a new line of credit. It is also used today by many employers who are checking out a potential new employee, and also by some employers as part of the employee's annual review to ensure that the employee is not digging himself into a financial hole outside of work hours. Your credit score is also starting to be used by car insurance companies to determine what rates you should pay, where their studies allegedly confirm that people with lower credit scores file more claims and for more frivolous items. |
Sometimes a credit score is also referred to as a FICO score. The term FICO comes from the Fair Isaac Company and is the method that is preferred and used by most credit bureaus to calculate a credit score.
Credit scores range from a low of around 350 (very bad credit) to a high of around 850 (excellent credit). An average score is between 650 and 700, which is where most consumers would not have big problems in getting approved for a new account. But if your score falls below the 600 range, you are going to have difficulty in being approved, at least at prime lending rates, for a loan, credit card, or new line of credit because potential lenders will view you as being a higher risk.
One thing you should note is that you should check your credit report at least once a year from each of the three major credit bureaus. It should come as no surprise to learn that the majority of consumer and business credit reports contain errors and mistakes, and the only way those get corrected is if you dispute the entries with the credit bureaus. If you have 2 or 3 negative entries on your credit report that should not be there or are being reported incorrectly, those by themselves could lower your credit score by as much as 100 points or more.
Assuming you have already gotten the inaccurate entries removed from your credit report, let's find out how a credit report is scored. Approximately 35% of your score depends entirely on how timely you pay on your monthly financial obligations. Always make it a point to pay your bills on time, and preferably before the due date so that you can be sure that the payment is posted to your account by the due date. Note that this is more than one third of your entire score, so you can see how important it is to make your payments on time each month.
About 30% of your score depends on the level of your outstanding balances to your credit limits. This is primarily for credit cards and department store charge cards. The standard rule of thumb is to try to keep your outstanding balance at one third to one half or less of your credit limit so that it does not appear that you are stretching your credit to the limits. No matter what you do, try to NEVER exceed your credit limit, since that act will lower your credit score almost overnight.
Approximately 15% of your score is related to the length of your credit history, or in other words, how long a period of time your credit report covers. The longer the better. For a young married couple or a student fresh out of college, they may have only a year or two of credit history, whereas many people have a decade or more of credit history on file.
As a surprise to many consumers, about 10% of your score is based on the number of credit inquiries on your credit report. If you submit a lot of credit card applications just because you got them in the mail, each of those causes an "inquiry" on your credit report, and too many inquiries will lower your score.
The remaining 10% is dependent on the type of mix of financial obligations you have. For example, with a mortgage, a car payment, an installment loan, a couple credit cards, and a couple department store cards, you have a good mixture of different types of credit, and this shows your flexibility in being able to manage all of these.
Being aware of how your credit is calculated can help you keep financial strategies in mind so that your credit score can be as high as it should be for you. For more insights and additional information about how to Raise Your Credit Score as well as getting a free copy of your credit reports, please visit our web site at http://www.credit-help-center.com
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