Are you one of the people that doesn’t understand how often decisions that affect your life are determined by your creditworthiness?
Most folks already know that lenders evaluate whether or not to extend you credit for purchases or loan you money for a home mortgages based on your credit scores. You may know that your interest rates and terms of the credit or loan agreements depend on your credit history which is reflected in your score. Unfortunately, many people don’t know that your credit score affects many other things e.g., hiring decisions (whether or not you get the job or promotion) and leasing/rentals approval (whether or not you get the apartment). Your credit score is the” silent director” in the play called “your life”. These reasons motivate us to keep our credit scores high or improve them when it’s needed.
There are a variety of “credit scores”, but your FICO score is used most often since all lenders want to make decisions on a level playing field. Fair Issac Corporation, FICO, was founded in 1956 and is the leading tool to measure your creditworthiness. FICO scores range from 350 (lowest score) to 850 (maximum score). Generally a score of 720 or above is considered “excellent” credit. A score of 680 to 719 are considered “good”. Score of 620 to 679 cause lenders to “investigate further” before approvals. Score of 585 to 619 will result in higher interest rates, but score below 584 will probably result in credit being denied.
Five factors influence your score:
· Payment History (35%)-Late payments cause your FICO score to go down. Paying your bills according to your contract improves your score. If your credit card, mortgage, rent or car note is due on the first or fifteenth of the month, be sure to pay it before that date not afterwards.
· Total Amount Owed (30%)-Your debt (how much you owe) compared to your total credit available matters in determining your score. Paying off you existing debt increases your score, but be careful of closing existing accounts since your credit utilization will change and adversely affect your score.
· Length of Credit History (15%)- As your credit history gets longer and you make payments on time, it improves your score.
· Types of Credit Used (10%)- Credit is given for managing different types of credit, e.g. revolving credit, auto loans, mortgages, etc.
· New Credit (10%)- A search for new credit to open new credit cards, retail store accounts or personal loans can hurt your score. If you’re shopping for a new car loan or a mortgage within a short period of time, it should not have a negative impact on your score.
FICO scores do not take into account a borrower’s salary, employment history, where they work, rental agreements, child support or other such obligations or interest on any current loans.
There are three credit bureaus with which lenders and businesses share information. They are Equifax, Experian, and Transunion. Each bureau collects different information which may cause scores to vary from bureau to bureau. As a consumer you are allowed to get one free credit report each year from each credit bureau. You should know your FICO score in order to understand your credit determination whether it is excellent, good, or less than acceptable.
To keep a high credit score or improve a less than desirable one, make your payments on time and pay off your existing debt as quickly as possible. Stop borrowing and/or using credit cards. Don’t close accounts when you pay them off. (You don’t have to use them, but they add to your “total credit available” and help you maintain a better FICO score.) Stop borrowing! Don’t get over your head in credit debt. (If you just pay the minimum amount due, check yourself. You may have over-extended yourself.)
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