understanding credit scores

By
Mortgage and Lending with Academy Mortgage NMLS#329710

A credit score is a rating for people who borrow money. Your credit score rates how responsible you are about borrowing and repaying money. Just like high test scores can help a student get accepted into more colleges, a high credit score can help you get approved by more lenders. Also, the higher your credit score, the less money you may have to pay in interest when you borrow, because you can usually get a lower rate.

What's in a credit score?

Credit scores are based on credit reports, which contain your credit history. The credit score is used by lenders to help predict how risky it would be for a lender to offer you more credit. Knowing and understanding your credit score is important, because you can make changes to improve your credit.

For example, the credit bureaus that calculate credit scores might have incorrect information about you. You have the right to correct their records. Also, nobody's perfect. You may have some harmful financial habits that are easy to break-once you know they're harmful-and raise your credit score!

The most well-known credit score is called the FICO score, because it was developed by Fair Isaac Credit Organization. Although nobody, other than the credit agencies, knows how a credit score is exactly calculated, there's no mystery to the factors that make up a credit score. According to myfico.com, a division of Fair Isaac, helpful guidelines to understanding what goes into a credit score include*:

  • How promptly you pay = 35% of your credit score
  • How much of your credit limits you use = 30% of your credit score
    • So avoid exceeding or maxing out your credit limits
  • How long you've been using credit = 15% of your credit score
  • What types of credit you utilize = 10% of your credit score
    • A secured credit card and high-rate finance company loan don't do as much for your credit score as an unsecured card and low-rate auto loan
  • How much you've borrowed recently = 10% of your credit score
  • Other factors include:
    • Court judgments
    • Tax liens
    • Number of recent credit checks

What's a good credit score?

Credit scores typically go from a low of 300 to a high of 850, with the average person scoring in the low 700's. According to MyFico.com, a "good" credit score is considered to be 720 or higher. But over 40% of the U.S. population scores below that-and the majority of these consumers will find many lenders eager to serve them. Some of their best customers started off with less than perfect credit scores!

Credit counseling and credit repair services are also happy to serve those who want credit scores that show how responsible they really are.

* According to myfico.com, a division of Fair Isaac Corporation, as of August 2006. Fair Isaac and FICO are registered trademarks of Fair Isaac Corporation.

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