A three-digit number that you may not know about has an enormous impact on whether or not you’ll be approved for a mortgage, car loan or credit card and determines the interest rate you’ll pay. Along with your credit history, it can also affect whether you get a job, can rent an apartment or what you pay for insurance. That important number is your credit score, a figure each credit bureau develops after evaluating the information in your credit report.
The good news is, you control how high or low your score is through your bill-paying habits and overall handling of debt.
Using credit scores to determine a borrower’s creditworthiness is a lending-industry standard. That’s because it has been proven that a credit score is the best predictor of a person’s repayment performance, according to Barry Peperno, manager of consumer operations at Fair Isaac Corp. This Minnesota-based company developed the FICO ® score, the scoring system most lenders base their rates on. For instance, borrowers with high credit scores are usually offered lower interest rates, while those with lower scores may still get credit but will have to pay more for it.
Be aware that having a high score doesn't guarantee you’ll be approved for a loan. Lenders also take into account the information you supply in loan applications about your income and job history. So even with a high score you may not qualify for a loan if it appears that your income and existing debt will make it difficult to manage additional loan payments.
The three major credit reporting agencies may each assign you a different score, based on the specifics each has on file. But they follow a similar method to come up with that number, which can range from 300 to 850. The median score in the United States is 723.
Knowing your FICO score and understanding how it is calculated can help you improve your credit profile and thus affect what you pay for financing. The mathematical formula relies heavily on the following five categories. The percentage by each indicates how much that category rating counts toward your total score.
The more late payments you have and the more recent they are, the more points you lose. A 60-days-late payment a month ago hurts your score more than a 90-days-late payment five years ago. Bankruptcies, foreclosures or other debt collection actions will also significantly lower your score. Fortunately, a recent history of timely payments can help offset past delinquencies.
Limiting the total amount of debt, you take on-through lines of credit, credit cards and/or installment loans is crucial. Credit grantors like to see that you use your accounts regularly but without reaching your credit limit. You'll lose points for being close to your maximum charge limit on any single card, and using nearly all available credit on several accounts will severely lower your score. Creditors will see this as a sign you might have trouble making future payments.
In general, the longer your credit history, the higher your score. One of the factors that scoring considers is the average age of all your accounts combined. Don't close older, inactive accounts with zero balances that are in good standing. They can actually contribute to your score by lengthening your credit history and will stay on your report indefinitely. Records of closed accounts are deleted within 10 years.
Opening several new accounts over a short period of time can cost you points. Even applying for multiple credit cards, regardless of whether they're approved, can hurt. There are exceptions for auto and mortgage loan requests. All inquiries for those types of credit within a few weeks' period are classified as one inquiry. "If you're shopping for a car or house loan, try to consolidate all of your inquiries within several weeks so that you don't damage your credit score," advises John Ford, Chief Privacy Officer at Equifax, a credit reporting agency.
*Checking your own credit report or score never counts against you.
Having different types of credit-installment loans, charge cards or lines of credit, is viewed positively because it demonstrates you can handle various types of payment obligations. This factor may be given more weight when you are first establishing a credit history because you have little other information to be scored.
For more information on credit scores, please call the "Credit Doctor" at Magic Funding Group, Inc. so we can assist you in achieving your financial goals regardless of your credit history at
Office: (407) 355-3192
After 7pm EST: (321) 228-2800
E-mail: Tlou@cfl.rr.com
