When you apply for credit, whether for a mortgage, an auto loan, or a credit card, your credit score will determine whether or not you can secure financing, and what type of interest rate you can get. While you probably have at least some idea of how good or bad your credit is, it is important to understand your credit score and how it is calculated.
A credit score is a three digit number that ranges from 300 to 850. Each of the three major credit bureaus use this rating system that was devised by the Fair Isaac corporation - commonly called a FICO score. Your FICO score is calculated by measuring three distinct aspects of your credit.
1.A third of the score is based on your payment history. If you have defaulted on one or more loans, or been more than thirty days late making payments on your credit accounts, your credit score will be adversely affected.
2.The next portion of your credit score is determined by your credit to debt ratio. If you have a number of credit accounts close to being maxed out, or if your total debt is too great, this part of your score will suffer. Conversely, if you keep your credit balances reasonably low, your score will be higher.
3.The final part of your credit score takes three separate factors into account: the length of your credit history, the amount of credit for which you have recently applied , and the type of debt you have. Of the three, the length of your credit history holds the most weight. If you have established a long history of repaying your debts on time, you will be looked upon as less of a credit risk. Another aspect of your credit score is the number of recent applications you have. The greater the number, the lower the score. Finally, the types of credit you carry will affect your credit score. A credit card from a bank would have a more positive effect on your score than would a store credit card. Applying for credit with a finance company could label you a higher credit risk, and may be seen as a last resort for someone who could not get a bank card.
Once your score has been determined and made available to prospective lenders, it is often the only factor considered in determining your eligibility for credit and the interest rate you will receive. A higher FICO score will translate into savings when you apply for credit. A lower score may increase your interest rate which may cause you to have to borrow more money than you would have otherwise.
Also, information provided by credit reporting companies is not always accurate. You should acquire a copy of your credit report for inconsistencies and inaccurate items. If you find any questionable items on your credit report, you have the right to dispute them and possibly have them removed.
Once you understand the effect that debt and use of credit has on your credit score, you can devise a plan to make any necessary repairs to your credit. As your credit score improves, you will pay less when you borrow money, and you will find more and more lenders eager to do business with you.
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Frequently Asked Questions
Settlement Offers-Does this help or hurt your credit score????
By: Nettie | 26-08-2008
Lita...I have heard that it is not wise to accept a settlement offer from a creditor. I have been told that even though the creditor accepts a smaller amount from a consumer and agrees to settle the account as paid in full, it is still damaging to your credit and will show up on your report as a write off and not a settle account. Is this true?
Thanks
Nettie
Higher number
By: its me | 24-08-2008
My credit report states that i should obtain a revovilng line of credit t help my score. what would be the best way of obtain that. my credit score is low but not very low.
Unsecured Credit Card Debt
By: TM | 22-08-2008
I live in Oklahoma. My question is about unsecured credit card debt.Can the credit card companies put a lien on my home for non-payment of the debt? I have a Homestead Exemption filed.Also, can my wages be garnished for these unsecured debts? Thanks, TM
Deed in lieu of foreclosure vs foreclosure
By: Leaving | 15-08-2008
Is deed in lieu of foreclosure hard to get? How long will it show on my credit report?
Domesticating a Default Judgment in FL and Car Lien from Creditor
By: Sharonzzzzz | 03-08-2008
I have a default judgemnt and the attorney for the creditor (Cach LLC) said he is going to domesticate the default judgment in Florida and then put a lien on our house and cars. The default judgment is in my name only (not my husbands). First...can you domesticate a default in Florida? I've heard you can't. Second...can they put a lien on my husbands car? The title says both our names with OR (not AND). They are both paid off in full. Third...if they do put a lien on the cars, can they then come and get them or do they have to wait until we try to sell them. Thank you.
Credit Report Question
By: Hello, Chad! | 29-07-2008
How Long Do Previous Addresses Stay On Your Credit Report?qt=q
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