What
is a Credit Score and Why You Should Care
If
you have a growing family, you probably know how difficult
it can be to stretch your dollar. Borrowing money on credit
is sometimes the only way to make ends meet, especially if
there is an unexpected expense, such as a car repair. That
is why having good credit is so important. And, that is why
it is also just as important to know how "good credit" is
determined.
Creditors
use credit scoring systems to decide if borrowers are a good
risk. Information is taken from the credit application and
the credit report so the creditor can evaluate several areas:
Bill-paying
history
The number and type of accounts opened
Late payments
Collection actions
Outstanding debt
The age of the accounts
The
credit scoring system looks at you objectively by comparing
your credit information to the credit performance of consumers
with similar profiles. This gives them a credit score. This
score predicts the likelihood that you will repay the loan
and whether you will make the payments on time.
Credit
scores affect all areas of your financial life. That's why
you need to understand the basis of these scores. Credit scores
are driven by both positive and negative information in a
credit report. Here is the breakdown of your credit score.
Approximately 35% is based on payment history. A lender must
know how you have paid in the past to decide if he will give
you a loan. About 30% is based on the amount of debt owed.
Owing a great deal of money on numerous accounts can indicate
that you are overextended. Another 15% of the score is based
on length of credit. Typically, a longer credit history will
make your score better. Another 10% is based on how many accounts
you have open. Opening several credit accounts in a short
period of time can impact a score negatively. The final 10%
is based on a combination of credit cards and installment
loans. While a healthy mix will improve your score, it is
not necessary to have one of each, and it is not a good idea
to open credit accounts you do not intend to use. Credit scores
range between 300 and 900. In general, a credit score of 700
and greater is considered "good credit". Borrowers with these
scores receive the best interest rates on loans.
There
are three major credit bureaus that report credit scores:
Equifax, Experian and TransUnion. Credit bureaus calculate
a credit score each time a credit report is requested by a
lender. It is based on the current information in the credit
file. Be sure to request a copy of your credit report each
year from the three major credit-reporting agencies to make
sure your credit report is accurate.
