Understanding your credit score.
By admin on February 24th, 2009
By Ian Sani.
Do you know your credit score? Do you know how important it is? Some people don’t realize how important it is. Your credit score may be called with many terms, like credit rating, FICO rating, or a credit risk score.
Credit score is very important because it will let lenders to get an idea of how likely you are to repay your bills. Every time you apply for credit, apply for a job that requires you to handle money, your credit score is checked. Your credit score can be checked by anyone with a legitimate business so they know whether they can trust you financially or not.
The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are. The higher your credit score, the better credit risk you make and the more likely you are to be given credit. Scores below 600 will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates. But it all depends on the lender, how strict they are. Some lenders will also look at your entire credit report and other can accept or reject your loan application based solely on your credit score.
The credit score is based on your credit report, which contains a history of your past debts and repayments. Credit bureaus use computers and mathematical calculations to arrive at a credit score from the information contained in your credit report.
Each credit bureau uses different methods to do calculate credit score but most credit bureaus use the FICO system. FICO is an acronym for the credit score calculating software offered by Fair Isaac Corporation company. Because it is widely used, credit scores are sometimes called FICO scores or FICO ratings, although it is important to understand that your score may be calculated using different software.
To help people or company access credit score there are credit bureaus which creates credit reports. They will provide their information to companies as credit card companies and utility companies.
Once a file is begun on you when you open a bank account or have bills to pay, the information of your payment is recorded at credit bureaus. They will use all those information to calculate your credit score. Those information are:
- Your credit history (accounts for more than a third of your credit score in some cases). Late payment, loan defaults, unpaid taxes, bankruptcies will lower your score.
- Your current debts (accounts for approximately a third of your credit score in some cases). If you have lots of current debt, it may indicate that you will have trouble paying back debts in the future.
- How long you have had credit (accounts for up to 15% of your credit score in some cases). If you have not had credit accounts for a long time, lenders won’t know whether you make a good credit risk or not.
- The types of credit you have (accounts for about one tenth of your credit score, in most cases). Lenders like to see a mix of financial responsibilities that you handle well.
Jennifer @ Money Saver 101
Credit scores are incredibly important, which is why Experian’s decision to no longer sell FICO scores to their customers comes as such a huge and disappointing blow!
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