When you apply for credit, whether for a mortgage, an auto loan, or a credit card, your credit score will determine whether or not you can secure financing, and what type of interest rate you can get. While you probably have at least some idea of how good or bad your credit is, it is important to understand your credit score and how it is calculated. A credit score is a three digit number that ranges from 300 to 850. Each of the three major credit bureaus use this rating system that was devised by the Fair Isaac corporation - commonly called a FICO score. Your FICO score is calculated by measuring three distinct aspects of your credit. 1.A third of the score is based on your payment history. If you have defaulted on one or more loans, or been more than thirty days late making payments on your credit accounts, your credit score will be adversely affected. 2.The next portion of your credit score is determined by your credit to debt ratio. If you have a number of credit accounts close to being maxed out, or if your total debt is too great, this part of your score will suffer. Conversely, if you keep your credit balances reasonably low, your score will be higher. 3.The final part of your credit score takes three separate factors into account: the length of your credit history, the amount of credit for which you have recently applied , and the type of debt you have. Of the three, the length of your credit history holds the most weight. If you have established a long history of repaying your debts on time, you will be looked upon as less of a credit risk. Another aspect of your credit score is the number of recent applications you have. The greater the number, the lower the score. Finally, the types of credit you carry will affect your credit score. A credit card from a bank would have a more positive effect on your score than would a store credit card. Applying for credit with a finance company could label you a higher credit risk, and may be seen as a last resort for someone who could not get a bank card. Once your score has been determined and made available to prospective lenders, it is often the only factor considered in determining your eligibility for credit and the interest rate you will receive. A higher FICO score will translate into savings when you apply for credit. A lower score may increase your interest rate which may cause you to have to borrow more money than you would have otherwise. Also, information provided by credit reporting companies is not always accurate. You should acquire a copy of your credit report for inconsistencies and inaccurate items. If you find any questionable items on your credit report, you have the right to dispute them and possibly have them removed. Once you understand the effect that debt and use of credit has on your credit score, you can devise a plan to make any necessary repairs to your credit. As your credit score improves, you will pay less when you borrow money, and you will find more and more lenders eager to do business with you.
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