What does Credit Score mean?
A credit score is the three-digit, numerical representation of a person’s credit worthiness. The number is derived through detailed financial information collected by credit bureaus.
Why is a credit score important?
An individual’s credit score plays an important role in determining a person’s ability to secure financing to purchase a home or a car or to obtain a low interest rate when requesting a personal loan. If a person has a high credit score and is able to secure a low interest rate they may be able to save hundreds of thousands of dollars over the term of a loan. This is especially true for long-term loans such as a 30 year home mortgage.
Credit scores are also used by other businesses or entities to evaluate a debtor’s risk. For example, credit scores are currently used by landlords to determine if a renter may make a good tenant, an insurance company to determine whether the insured is a high risk, or a utility company to determine whether the individual should be required to pay for services up-front. Some employers may even review an applicant’s credit score to determine whether they would be a strong candidate for employment.
What is a good credit score and how do I find out my score?
There are several companies which calculate credit scores, although the most widely used score is called FICO (Fair, Isaac and Company) and is used by the largest credit bureaus (Equifax, Experian, and Trans Union). Scores range from 300 (low) to 850 (high). Individuals who have scores of 740 and higher are typically considered less risky and are entitled to the best interest rates.
What actions lower my credit score?
As a consumer, it’s important to understand what actions can lower your credit score. One of the most important factors is making your payments on time for any type of revolving credit. In fact, payment history accounts for 35 percent of your credit history.
Other important factors which can lower your credit score include closing credit card accounts, not having different types of credit, maxing out your credit cards, and applying for unnecessary credit. Other actions which can significantly lower your credit score include repossessions, filing bankruptcy, judgments for unpaid debts, liens, and voluntarily surrendering assets back to the creditor.
What do I do to improve my credit score?
As mentioned above, the number one step consumers can take to make sure they have a high credit score is to pay all of their bills on time or according to the contractual terms of the loan. Next, do not max out credit cards or take out unnecessary credit. Make sure to have a variety of loans or credit lines which you have consistently paid. Finally, avoid bankruptcy, property repossession, and judgments.