An important element of managing your finances is keeping tabs on how you handle borrowed money and repay debt. Your responsibility when it comes to these matters factors into lenders’ decisions about approving you for loans and credit. Building a strong reputation with lenders is the foundation of a healthy financial life. One of the indicators of how you handle credit is your credit score.
What IS a credit score?
Your credit score is a numerical representation of the degree of financial risk you represent to a lender. The score is calculated according to a formula, utilizing data contained in your credit report. You can – and should – review your credit report yearly; get your free credit report at AnnualCreditReport.com. This is a means to monitor your financial standing with your lenders and make certain that the information it contains is correct. Should you find inaccurate information in your credit report, it is important to dispute the error so it can be rectified and your good standing can remain intact.
While your credit score is not contained in your credit report, it is influenced by the information it contains. You can obtain your credit score from the same reporting agency from which you receive your credit report; often, however, a nominal fee is required to obtain it. The higher your credit score, the better, as it indicates you offer a lower risk of defaulting on a loan or paying late. Those with higher credit scores are more likely to be approved loans and credit and often receive lower interest rates on borrowed money.
You’ve no doubt heard of a FICO Score; this is a credit score calculated by Fair Isaac Corporation, the largest and most widely-known of several companies providing software for determining credit scores. Your FICO credit score will fall between their parameters of 300-850. Other agencies may score differently so it’s important to understand the range of the particular source of the score you receive.
What makes up a credit score?
In calculating your credit score, five particular factors are examined:
- Payment history (determines 35% of your score) – A strong history of paying your debts on time indicates you take your financial responsibilities seriously.
- Amounts owed (determines 30% of your score) – The amount you’ve borrowed and responsibly repay in relation to your total credit limit is a strong indicator of your ability to manage your credit.
- Length of credit history (determines 15% of your score) – How long your credit accounts have been established and how long it’s been since you used them will indicate the history of your credit utilization.
- New credit (determines 10% of your score) – Since the age of an account is taken into consideration, it’s best not to open a lot of new accounts at once.
- Types of credit used (determines 10% of your score) – Having a various kinds of credit indicates that you have experience handling more than just one type, providing a wider view into your credit management abilities.
What factors affect a credit score?
Simply put, paying all your bills on time, borrowing with discretion, and maintaining long and successful financial relationships with lenders will lead your credit score in an upward direction. Failure to do so will result in a lower score. It is possible to raise a lower credit score by establishing or reestablishing good repayment habits. It will take time and tenacity, but it can be done in the long run.
Responsible use of credit allows you the ability to borrow money when you need to. It’s important to monitor and actively take steps to improve your credit score. Your financial reputation depends upon it.
{ 0 comments… add one now }