Understanding Your Credit Score
We often hear about credit reports and credit scores, but they aren't easy to understand. In fact, there is no set calculation that consumers can use to determine their personal credit score. No matter how confusing, it's essential that consumers understand the impact that credit scores have on nearly every element of their financial lives, including their bad credit debt consolidation. While it's impossible to calculate your score, there are strategies you can employ that will boost an benefit your overall score.
What is a credit score?
A credit score, also called a FICO score, is a number between 300 and 850 that rates a consumer's creditworthiness. The higher the score, the more likely a consumer will be approved for a loan, and at a preferable rate. The lower the score, the higher the interest rates available to a consumer, and the likelihood decreases that loans will be approved readily. Credit scores as we know them have been around for nearly 50 years. Today, consumers have the right to view their credit reports and credit scores (for a nominal fee). Consumers should strive to get scores above 700, which will result in preferable loan rates and programs.
How does my credit score impact me?
Credit scores affect many parts of life. The obvious results occur when a consumer applies for a mortgage. If the borrower has a good credit score, a loan at a relatively low interest rate would likely be approved. This is because a high credit score means a borrower is more likely to be responsible and repay the loan on time – the borrower isn't a risk.
You may find this situation in your own life – the interest rates on your credit cards are tied to your credit score. The time and effort it took to find the right auto loan could have been impacted by your credit history. But your credit score will affect you even when you drive that car to work: Insurance companies will use information, including credit reports, in their determination of insurance premiums. Quite literally, your credit score will affect nearly all of the big bills you face in life.
What goes into determining a credit score?
While there is no set calculation available for determining a credit score, we do know the value that several factors have in your FICO score. For most consumers, their FICO score is based on these issues:
- 35%: payment history
- 30%: amounts owed
- 15%: duration of credit history
- 10%: new credit
- 10%: types of credit used
How do I boost my score?
Now that you know what goes into your score, you also can employ strategies that ultimately will improve your score. Consider taking these steps to improve your credit score:
- Always pay your bills on time
- Keep your balances low – no more than 30 percent of the available credit balance
- Resist the urge to open new accounts. Only open accounts (such as credit cards) when you absolutely need them)
- Similarly, keep your accounts open for several years. Don't open and close accounts haphazardly.
- Don't take on more debt than you can afford
If you have any questions, please check our Frequently Asked Questions page.
