Understanding Your Credit Score

Understanding Your Credit Score
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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Gregg Pennington writes articles on a number of topics
including loans, debt and credit. For more information
about debt help and credit repair visit:
http://www.onlinemoneysources.net/debt-and-credit.html