U is for Understanding Your Credit Score

U is for Understanding Your Credit Score

understanding credit score

Did you know that a simple three-digit number may stand between you and a car loan or home mortgage? This number is your credit score! Do you know that in the past you weren’t able to view this score? Well today, thanks to pressure from Congress and consumer groups, you can and should review this periodically.

What exactly is a credit score?

Your credit histories are chronicled in credit reports. Financial institutions use this score in their evaluation and approval process when you apply for credit.  A credit score, typically called a FICO score, named after the company that develop it, Fair Isaac & Company, is one number between 300 and 850. When you have a high number  chances are lenders will believe you are a good candidate for a loan, based on your history of making payments on time.

How do I get my Credit Score?

The Web site www.myfico.com will sell you a comparison of your three credit reports from the three main companies: Experian, Equifax and TransUnion along with your FICO score for $40. For this price you also gain access to a feature on the site that lets you create hypothetical situations, such as paying off a particular debt or paying credit card bills on time, etc. You can then see how these actions might affect your score.

What is a good score?

It’s best to have 720 or above as a score. If you do, you are generally put into the same category as those with higher scores and viewed as a safe risk by lenders and be able to receive a loan without a problem and at a lower interest rate. However, if your number is below 700, it’s definitely worth your time to try and pump up your number.

How do I raise my credit score?

Raising your credit score cannot happen overnight, but you can do so in a relatively short period of time.  You see the scoring formula gives more weight to recent activity. Even six months of “good behavior” can have an effect on your score and demonstrate that you are making better financial decisions. Here are some guidelines:

  • Pay bills and other payments on time, this will have the largest positive impact.
  • Pay down balances, the lower the amount of credit you’re using will allow for more credit available to you. FICO scores reward people who use a small percentage of their available credit.
  • Don’t open a lot of new accounts at once – this makes lenders wary – especially if you don’t have a long credit history. Having no more than five credit cards is recommended.
  • Rotate and use all of your cards – a dormant credit account will not help your score.
  • Should you ever have a late payment, it’s worth a call to the lender to see if they will remove this information from your records in a “goodwill adjustment.” If you choose to dispute the late payment report, the item will stay on your credit report but not factor into your FICO score.

Having a good credit score is essential. Keep in mind that FICO scores do not take your age, income, assets or employment history into account. Certain lenders, though, may pay close attention to income, assets and employment history. Also, FICO scores treat all late payments equally. However, an auto finance company may look at customized scores for their industry.  If you’ve been late on credit card payments but never missed a car payment, they may take this into consideration.

Answers from AZ


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