Loans & Credit
We live in a world where we are defined by numbers. Your age, your weight, your height, your salary, and your tax bracket are just a few. Do you have a two-car or three-car garage? How many children do you have? At what age do you plan to retire?
One of the most significant numbers in your life is your credit score. Businesses and lenders use it to make judgments about you and your ability to pay back loans. Some businesses are even looking at credit scores when making hiring decisions.
It’s an important number and it probably matters more than you realize. The better you understand your score and what affects it, the better control you can have over your financial future.
Types of Credit Scores
Most of you are aware of the two main credit scores that impact you. They are FICO and VantageScore. The “FICO” score was developed originally by Fair, Isaac and Company, and is now better known as simply FICO. Businesses use these scores when making credit decisions. The FICO score can be adapted to meet unique or specific needs based on industry or even types of loans.
VantageScore was created as an alternative to FICO by the big three in the credit business, Experian, TransUnion, and Equifax. It was launched in 2006 and has since remained a force in the industry.
Additionally, alternative credit score models and individualized models are used in-house by large corporations. They often factor traditional credit scores into their risk assessments.
Understanding Credit Scores
Suppose you are preparing for a major credit purchase, such as a car or a home. In that case, it is a good idea to get a copy of your credit report to make sure the information is accurate and updated.
It’s also a good idea to know where you stand, credit-wise, before applying for any loans. Fortunately, you can obtain a copy of your credit report from any of the three major vendors one time each year. You can also get your credit report free from annualcreditreport.com, which Federal law authorizes.
If you are willing to pay for subsequent copies you can get more than one each year. One good way to keep a running check of your credit report throughout the year is to get one copy from one of the three major organizations per quarter. That way, you never have to pay, and you have a good idea of your credit picture.
So, what does your credit score say about your credit situation?
For the average person, it does not say much. However, to lending organizations, it can reveal a lot. The information that is considered most important to these groups includes:
- Payment history. They want to see that you have a history of on-time payments.
- Account age. The longer you have credit accounts, the better. It is in your best interests to maintain old accounts rather than closing them for this reason.
- Credit utilization. This score represents the amount of credit you are using compared to the amount of credit available to you. The lower this score, the better. Ideally, you want your credit utilization to be less than 30 percent of your available credit.
The information in your credit report, combined with your credit score, helps lenders determine whether to extend credit to you.
What Affects Your Credit Score?
Credit scores can be affected by a wide range of everyday events, including some things that may surprise you. For instance, applying for credit can harm your credit score.
This is especially the case if you go and suddenly apply for many types of credit (credit cards, auto loans, mortgages, etc.) at the same time. Lenders would rather see fewer credit applications and long-term relationships with the creditors you do have. The things that affect your credit score most include:
- Late payments
- Excessive debt (high debt-to-income ratio)
- Credit utilization (30 percent or more)
- Default history
- Too many credit inquiries
- All new credit
Solve these problems on your credit history to enjoy faster approvals, more approvals, and lower interest rates.
- Total debt, credit utilization, account history, and payment history all have strong impacts on your credit score.
- Your credit score impacts the amount of money you can borrow and the interest rate you will pay for that loan.
- You should monitor your credit score and take steps to improve it whenever you can.
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