Credit Scores: Numbers That Matter

By: Trevor Mulholland

Getting something on credit is something that has become a necessity for many people nowadays. After all, it isnít everybody who can buy a house or a car outright for its cash price! To be able to purchase such high-ticket items, a person would usually apply for a loan. And people who are planning to apply for loans should always remember that having high credit scores would be in their best interest.

And itís not only lenders who consider credit scores an important part of a consumerís financial health. Insurance companies, utilities, and landlords also look at a personís credit score to determine the rate they will charge for services they provide. Even employers sometimes consider a potential employeeís personal credit information among the criteria they use in their worker selection process. Obviously then, making sure that one has a high credit score would facilitate his or her efforts to get additional credit, a roof over the head, or a job.

A personís credit score can range from between 300 and 850. A score that is above 680 would usually enable a person to get loans, such as mortgage financing, at no trouble at all and at low interest rates. A score from 621 to 679 is still generally okay, but you would probably have to pay higher interest rates. If your score is under 600, chances are creditors will not approve of the loan for which you are applying.

Your credit score is calculated by Equifax, Experian, and TransUnion Ė the so-called ďbig threeĒ credit bureaus. Contrary to popular opinion, these three agencies use the same formula to come up with a personís credit score; itís just that they give these scores different names. Experian calls it the Experian/Fair Isaac Risk Model; Equifax calls it the Beacon score; TransUnion dubs it the Empirica score. Sometimes, even though these agencies basically use the same formula, a person might find that he or she gets differing scores from each. This is because the information the agencies use to calculate a personís credit score may vary; it may be because one agency has more updated information, or maybe a creditor shared your data with one agency and not the other. In any case, the scores given the agencies will usually not have large discrepancies. Potential creditors will normally take the middling score and base your creditworthiness on that.

Just what are the factors that could negatively impact your personal credit score? There are several, and most of them are easy to understand Ė even prevent. Your history of making debt payments is an obvious factor, so is the total amount of debt that you presently have. The length of your credit history also affects credit scores; the longer your (good) history, the better. The kind of credit you have and credit accounts that you have opened in your recent history are also pertinent. However, it is not true that factors like getting a credit application turned down, your race, age, sex, level of education, or marital status affects your personal credit standing.

So if you find that your credit score could use some improvement, what are the best ways to go about it? Naturally, paying off your outstanding debts would be a good place to start. But donít make the mistake of closing an account whose balance you have finally paid off. A credit account that is in good standing would contribute to a higher score.

Also, be sure to make those credit card payments and other such payments on time. A delay of a day, a week, a month can have a snowball effect; a greater amount of minimum payments to make would only make it more difficult for you to come up with the money to pay. In addition, these late payments would only worsen the appearance of your credit report. Another thing that financial experts advice to help improve your credit score is to maintain a good mix of several types of credit. These can be revolving credit cards or installment loans. Having this mix demonstrates your ability to manage credit, which will be taken positively by creditors. Just make sure that you make the payments on time and to keep a healthy balance on these accounts.

Getting and maintaining excellent credit scores are not only important in todayís world; they have also become a necessity. Itís up to each individual, in cooperation with financial institutions and services, to take the necessary steps and precautions to make sure his or her personal credit status is seen in a favorable light.

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