Understanding your credit score
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Understanding your credit score

credit-score

A great credit score can mean big savings, and a bad one can mean the opposite

When it comes to finances, credit scores are some of the most important numbers you can have. A good credit score will help you get the best terms on your home and auto loans, as well as competitive interest rates on new lines of credit.

Low scores have the opposite effects: You’ll have to pay more to use credit and face higher interest rates on your home and car. Really bad credit scores can keep you from getting loan approvals, renting apartments, and even getting a job in some career fields.

If your credit card debt is out of control, there’s a good chance your credit score is low. Late or missed payments, reaching your credit limits, or having large balances will affect your score. If you’re concerned that a debt is hurting your credit score, call Consolidated Credit today. Our experienced credit counselors can help you get back on track, and advice is always free. Call us at (844) 336-0576 or get start online with our free Debt Analysis and a counselor will be in touch with you soon.

Is a credit scoring the same as a credit report?

Your credit score is a numerical assessment of your credit worthiness: the higher the score, the more lenders will trust you to repay the loans you take out. It’s a three-digit number between 300 and 900. Your credit report is different; it is a longer description that covers your credit usage history, as well as any other information that may be relevant to creditors.

How are credit scores calculated?

Credit scores from the major credit bureaus (Equifax and TransUnion) are calculated using a variation of the FICO score calculation. The FICO score (a standardized calculation developed by Fair, Isaac & Company) is based on five different factors. Each factor has a different “relative weight” in terms of its importance to your credit score. Understanding which factors are most important will help you prioritize your efforts when trying to maintain a strong credit score. It’s also a good place to start if you need to rebuild your credit score.

Understanding the Five Credit Score Factors

Credit History (35%) – This factor refers to your history of paying debts. Your credit history shows creditors how responsible you have been in paying your debts in the past. A consumer who consistently pays late or defaults is a high-risk borrower and will therefore have a lower score.

 

Debt Owed (30%) – This factor focuses on the total amount of debt you owe overall, relative to what you have available. If you have a lot of debt, creditors will consider you a higher risk borrower because you already have a large obligation and will be seen as unlikely to be able to handle new credit. Creditors are wary of lending to consumers who already have a high debt-to-income ratio.

Age in the use of credit (15%) — refers to the total amount of time that you have used some type of credit. Creditors consider a borrower with a long history of using credit to be a low-risk borrower, because that user is use to dealing with credit. New credit users have not yet established themselves in the eyes of lenders.

New Credit (10%) – This factor focuses on the number of new lines of credit you recently opened or applied for. Taking on a lot of new debt in a short period of time makes you high risk. Every time you apply for new credit, an inquiry is made on your credit report. Too many inquiries, within the last six months to a year, can have a negative impact on your credit score.

Types of Credit (10%) – The final factor focuses on the types of credit a consumer uses. Creditors will see that you can handle different types of credit; revolving credit, such as a credit card, or installment credit, such as a personal loan with fixed payments. Having a healthy balance of different types of credit will create a positive impact in this area.

Maintain a healthy credit score

Knowing the secrets to building your credit score can help ensure you maintain a strong credit profile, which will result in better interest rates and a smoother financial lifestyle. Knowing the composition of your credit score will also help you decide if you need to fix your credit score, and which path to take.

You should always check your credit scores at least six months before applying for a new loan. This will help ensure your credit scores are where you expect them to be, so you’re not surprise by higher-than-expect interest rates or stricter terms. If you find your credit scores are low, take steps to repair it now.

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