You have heard over and over how important it is to have a good credit score. You have heard how much it will save you in the future and how it is the key to personal financial stability. This is true of course, but you may be wondering what does your credit score mean? Your credit score is calculated from elements from your credit history and your current credit situation.
What Is NOT In Your Credit Score
Your credit report is made up of several components that are considered predictors of future credit performance. It may also be helpful to know what it not included in your credit score. While none of these are a component in the calculation of your credit score, some may be used by your lender in addition to your credit score to determine whether or not you are approved, your credit limit and your interest rates.
- Child Support/Alimony Payments
- Current Occupation
- Employment History
- Interest Rates on Current Accounts
The Scoring Method
The FICO credit scoring method is the most widely regarded by lending institutions and those considering giving you a line of credit. The method considers specific factors in determining your credit worthiness and then calculates a score that is then categorized for lenders to more easily consider a loan application or a credit line application.
The scores for FICO range from 300 to a perfect credit score of 850.
- Excellent Credit: 700-850
- Good Credit: 680-699
- Fair Credit: 620-679
- Poor Credit: Below 620
These ranges are not set in stone. Some of the credit bureaus and lending agencies widen some of the ranges such as the good credit range and lower some of the other ranges such as the excellent credit range. Also, those with credit scores below 620 are not all considered the same either.
Furthermore, some lending institutions have degrees of excellent credit, good credit, fair credit and poor credit. The credit score exists more as a guide than a hard and fast determiner of your credit worthiness.
How Credit Scores Help You
- Approval Is Fairer: Approval is based simply on the facts. The law prohibits other factors such as age and race to become involved in the lending decision. Your credit score and credit report, as long as you make sure they are accurate beforehand, provide the factual basis for approval, amount of credit offered and the interest rate given.
- More Credit Is Available: Quicker approval methods and better screening processes because of credit scoring has allowed lenders to offer more loans to qualified individuals. This makes it easier for someone with fair credit to get a loan. In the past, those with fair credit had a hard time getting approved for credit cards, car loans and especially mortgages.
- Interest Rates Are Lower: Because there is more credit available, lenders can lower interest rates based upon volume and not hike up interest rates. Also, because the screening process of using credit scores is a better evaluator of an individual’s likelihood to pay back the loan, the risk of lending has become lower.
- Past Mistakes Are Forgiven: Your credit report and credit score are continually updated and allow you to make up for your past mistakes. Credit scores take into consideration the time that has passed since you have had delinquent accounts and how long you have been making payments on time.
- You Get Loans Faster: With easier access to information as to your credit worthiness, especially in the electronic age, you can be approved for a credit card or a personal loan in a matter of minutes.
The Affects of Your Credit Score
A good credit score means more money that you can keep in your pocket. A good credit score means you can get the credit line you need to get the things that you want. A car, a house, a credit card for convenience and emergencies are all contingent upon your credit score.
- Credit Line Approval: First and foremost you have to be approved for a credit line. A line of credit, though it has to be handled responsibly, can be your lifeline to the things you want in your life.
- Credit Line Limit: The better your credit score, the more credit you will be approved for. This means larger limits on your credit cards, this means larger personal loans and this means you can bump up the amount of your mortgage to get the home of your dreams.
- Interest Rates: The interest rates that you will have to pay will be based upon your credit score and your credit history. According to the Fair Isaac Corporation, the difference in the interest rates you may receive based upon your credit score can vary dramatically. If your credit score is 520, you can expect to pay almost 50 percent more per month on your mortgage than someone with a credit score of 720.
Credit Score Management
You should keep in mind that your credit score may have some flaws. It is based upon information taken from your credit report. If the information in your credit report is not correct, then your credit score will not be accurate.
It is a good idea to check your credit report at least once a year, though every 6 months is advisable. It may take a while to get the inaccurate information on your credit report cleaned up. This means, that if you are planning a big purchase within the next 4 to 6 months, you should check your credit report immediately. Even just a slight increase in the interest rate on a large purchase such as a mortgage can cost you thousands of dollars over the life of a loan. You don’t want to pay that extra amount of money because of a mistake.
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