Understanding your credit score is important as it will guide you to make important financial decisions that could potentially save you money. Your personal credit score can be used by anyone loaning you money –a credit card company,applying for a car loan or a retail credit card. Credit card companies,home equity lenders,auto loan lenders and finance companies all use a model created by Fair,Isaac and Co,the San Rafael,California company that pioneered credit scoring over 40 years ago and which still pretty much dictates what happens in the industry today the field today. This score,your credit score,is most often known as FICO and stands as a snapshot of your credit history.
A low credit score can increase the price of any loan you would apply for and a very low credit score could also mean denial of your loan application completely. Here are the approximate percentages that determine your FICO Score.
- Payment history (35%). The largest factor determined on your FICO score is your basic payment history. The number of unpaid bills you have,any bills sent to collection,bankruptcies etc…The more recent the problem,the lower your score.
- Outstanding Debt (30%). Are your cards maxed out? High balances or more precisely,balances that are close to your credit limit can negatively effect your score. Keep your balances below 30%.
- Length of your credit history (15%). How long have your accounts been open? The longer,the better.
- Recent inquiries (10%). Every time you apply for credit of any kind,you create an inquiry on your credit report. Lots of Inquiries negatively effect your score.
- Types of credit in use (10%). Current loans from finance companies. How many and how much.
Your credit score will range between 300 and 870. The higher the better. As your score increases,your credit risk decreases. Exact numbers differ by lending institution but the average high approval score is 680 or above. Often times your score is taken from all three credit reporting companies and the middle score or average score is used.
Depending on the lending institution,your score can cost you. Some lenders will charge a higher interest rate if your score is below 600
When you apply for credit your score does not come directly from FICO. Instead each bureau has its own version of the rating system with its own name.
Equifax is called Beacon
Trans Union is Empirica
Experian is Experian/Fair Issac
A credit score of 680 or above can save you money, especially for home loans. If you are considering a significant loan you will want to be sure to check your credit reports first. If negative items appear on your report you have two choices. Live with it for 7 to 10 years or dispute these items. For more information on repairing bad credit Click Here.
Remember,understanding your credit score is a basic step in personal financial responsibility. It is advised that you regularly check up on your credit score to ensure that there are no mistakes or credit blemishes that do not belong there.
